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JMacDonald

Unhappy Ing Client At M*

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TR....Thank you for the response

 

I'm not sure that I understand,

 

"If you look beyond just raw performance and look at risk adjusted performance (aka alpha), indexing as a methodology has some advantages in some asset classes and cost is a factor as well."

 

If you are saying that during shortened time spans when the asset class is going up a lot, that funds with a higher beta(risk) and alpha(performance) will do a lot better than the index, I agree that this would be true; however the reverse happens when the asset class goes down.

 

Expenses would still be a consideration, although because the fund in the asset class is really moving at a fast rate the expenses would tend to be a smaller proportion of the performance of the fund on a short term basis(and people would not pay that much attention to the expense), however on a long term basis performance would even out, leaving expenses to the fund that would affect the fund performance on a long term basis..

 

 

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Guest TR1982

This is what I am saying:

 

1) Alpha is a measurement of the value a manager brings to a portfolio, i.e. the measurement of how much the portfolio outperforms its benchmark given the same level of risk in the benchmark (beta).

 

2) If the manager adds alpha it is net of expenses. So the expense ratio is factored into the alpha measurement. Therefore, it is largely irrelevant to the discussion. I have seen back tested portfolios over the last 10 years that use actively managed funds, passively managed funds, and a combination. The combination portfolios have the best overall performance on a risk adjusted basis.

 

It's fine with me if people want to be fixated on costs. That's certainly a winning issue from a consumer point of view and gets a lot of traction in the media. In the end, however, investors want the best return WITH THE LEAST AMOUNT OF RISK. Fixating on expenses will not deliver that objective consistently over time.

 

Regards,

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TR........talking about alpha only, of course some funds have a positive alpha, and do better than expected (and a they tend to get 5 and 4 star ratings by Morningstar; but also there are funds that have negative alpha and get lower ratings by morningstar. Some show better returns than expected while others show returns that do not measure up. The ones that consistently have a better alpha can be attributed to chance, as we had discussed. The index over time is slightly above the middle.

 

Now as far as a combination of index and active funds owned together cutting down on risk because of diversification, you said," have seen back tested portfolios over the last 10 years that use actively managed funds, passively managed funds, and a combination. The combination portfolios have the best overall performance on a risk adjusted basis." I think that this statement may be true, or at least worth looking into. I would be interested to read more about this, because I am interested to learn how to cut my overall portfolio risk as much as possible. In fact, I had a combination of active and passive, and am in the process of converting to passive only.

 

Ira

 

 

 

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TR,..........I posted the question about lower risk on the diehard site.........Between you and me, I'm thinking that for shorter time spans a combination might have the lowest risk(volitility), however for longer time periods the indexes might have the advantage because volitility becomes less important.

Anyway, it will be interesting to see what they answer.

Ira

 

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Guest TR1982

Ira,

 

I appreciate the link you sent me. Did you notice this quote?

 

"Hence, I guess I would be in the camp that would argue that a carefully selected combination of certain actively and passively managed funds would give you the best risk-adjusted returns over time."

 

This is just one person's opinion but it would seem to lend weight to what I proposed.

 

Regards,

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TR.............There were seven responses to the question..............as usual, you pick one persons opinion, from several contradictory statements, that supports your position. Next, I expect that you will be printing this opinion up, distributing it to your clients and potential clients.

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Guest TR1982

Snippy, eh?

 

I simply pointed out that someone actually agreed with what I said. It doesn't matter to me whether 7000 people responded and agreed with my statement. That wouldn't make it true or not true. Only the facts would make it true.

 

The simple truth is, I know it's true because I've seen the research. You can disagree if you want, we live in a free world.

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I guess your right, I was snippy, sorry.

 

Actually it can be true, so can the others. Let's be honest, even though we know a lot more than the average, both you and I are not academic experts.

 

Do you remember the source of the research?

 

Ira

 

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