I was talking with my sister last night and the subject of index funds
came up, she
is a firm believer and extolled the virtues of them (mainly lower
vs. a traditional stock fund. What has been your experiences in this
The subject came up in the context of a rather large inheritence that
distributed to myself and siblings before the end of this year.
Personally, I don't believe you can consistently beat the market.
Even if you could, it would require a lot of time and effort to do
so. I'm not willing to put in that time and effort, nor am I willing
to pay someone else to do so. Therefore, I stick with index funds.
If you are talking a garden variety domestic large cap fund, I think
you'll find the actively managed ones with recent outperformance of
sp500 are just on a kind of 2 year lucky streak. It appears cyclical,
especially if you overlay a graph of them vs an index. The current
good ones were duds a few years ago and v.v. for current duds.
Therefore the ones that seduce you now are most likely to disappoint
You don't have to take anybody's word on that - just play with long
term graph overlays with some fund candidates. Good learning exercise
Broad index funds may be more consistent and save a bit of expense,
but they aren't the ultimate. They offer an easy start, but with time
you may see how both kinds of funds fail to take advantage of obvious
macro trends, which you can handle better by juggling several sector
Or for new-age types allergic to books and partial to videos, I think
at least lecture 4 of
has great insights on portfolios, and how mutual funds aren't
supposed to be stock pickers at all, but rather risk and return
This is by the Yale titan of plain-financial-talking who you have seen
interviewed a dozen times on TV, being the only adult in the newsroom
(and I guess half owner of the Shiller house index or whatever). He
covers insurance and much else, usually explaining how current
practices have gone awry from their theoretical sweet spot. This is an
actual class recording where he comes across rather more left wing
than his avuncular centrist TV persona, but a pragmatist in either
On Fri, 19 Nov 2010 08:47:38 CST, Bill Woessner
I agree, and prefer taking a nap, reading a good book, riding my bike,
walking my dog or going on a trip. Besides, the older I get and the
more cycles I experience, I'm not convinced there are any stock
picking experts - least of all me.
I subscribe to a newsletter which has a Monthly Upgrader Portfolio
(MUP) which holds growth mutual funds and typically has 1 or 2 trades
a month. Below are the performance numbers:
Performance as of 4/30/10 MUP S&P 500
1 Month Return: 1.9% 1.6%
Year to Date (YTD) 7.7% 7.1%
12 Month Return: 40.0% 38.8%
Since Incep (3/25/98) Annualized: 10.6% 2.4%
Performance as of 10/31/10 MUP S&P 500
1 Month Return: 3.1% 3.8%
Year to Date (YTD) 5.1% 7.6%
12 Month Return: 12.9% 16.2%
Since Incep (3/25/98) Annualized: 9.9% 2.3%
So in April the MUP was ahead of the S&P 500 but in November it is
behind (which is unusual.) However when you look at 13 year
performance MUP is ahead by a factor of four.
I wonder if that is the fundx newsletter; their funds can automate
that process and did great for a while but stumbled lately and gave a
return advantage a bit less than you quote:
I forget how to annualize, but here is a switching service that surely
must give even better results and has increased 10 fold over the last
dozen or so years of flatish sp500 (with very little backsliding):
The switch instructions are free, but unfortunately the analysis
behind the switches has recently required a token payment because the
author found his freebie statistics were being resold. He does very
well in choppy or bear markets, but is too conservative for my tastes
in bull markets. This might work well to follow for 20% of your
portfolio, which would do more than pick "better" funds, but fine tune
asset allocation since it delves into bonds and gold as well as stock
Unfortunately leaving the switching to an active fund manager doesn't
seem to work well - they seem to get too timid, especially in down
markets. Then they abandon their stated strategy and follow the sp500
to avoid stigma of underperforming for example. With that, they can't
bounce back properly.
I think active switching by yourself works well when you widen your
scope away from domestic big cap growth funds, which seems to take you
to a less efficiently priced market. I am just getting into the part
of the Yale course where he describes the theory about the near
impossibility of beating sp500, and how his research shows that is
quite wrong. I know it can be easy to beat sp500 much of the time from
both personal experience and observing switching services such as
fundx and decisionmoose.
you actually have a couple of questions... the last not being really
We just went thru this with my wife's parents,
and you need to be careful for any required IRS taxes...
We were told to keep liquid 50% for any potential estate clawback.
Where are the funds coming from - Insurance, IRA, other investment holdings
Index Funds -
You can go after index funds - but the follow up question
would be what sector ? and are you going to spread it around ?
Using Vanguard as an example -
VBMFX (bonds) VGTSX (global stock)
or there are 9 SPDR sectors -
But it appears you missed his tripling up to 2000 and then zeroing
that out to reflect his change to etfs. So I annualize his 14 year
returns to 26.1%, while the sp500 was nearly brain dead!!! And note
again that his backsliding was near zero except for a recent couple
weeks (some say low variance is as important as returns, so might try
a var calculation).
Details: Since he reset $275,417 down to $100,000 in 2000, I multiply
his current results 2.75417 x 931 889 = 2 566 580.73 . Since that is
over 25 fold in just over 14 years, I conservatively calculate
(25.66580731^(1 / 14)) - 1 = 0.260863896 .
Just for a sanity check without the fudge factors, I recalculate the
run from 2000 up to his 2009 peak and get (10.13505^(1 / 9.5)) - 1 =
0.276075616 . So 27.6 % annualized returns which is about the same,
although avoids his one time recent 10% loss.
Only one loss is amazing thru the choppy and bear markets we had, and
that is thru the technique of liquidating stock allocations as
appropriate. It is disgraceful that practically no fund does that
competently. Most even rule it out, but those that do asset
allocation are timid bowls of jelly at reinvest times.
Look at this pathetic flatline from fundx tactical fund
. Their reason-for-being is to
liquidate on downturns, which they failed to do, and reinvest on
upturns, which they did for a couple weeks then flatlined (in cash)
horribly, even until now.
Similarly look at Hussman fund which has a very disciplined long/short
hedging approach. Don't presume L/S skepticism until reading their
discerning approach or seeing their fabulous long term results (over
the red flatline sp500):
But look at the period after the 2009 crash. Their stock returns have
been fabulous (in purple) giving many times the sp500 bounceback, but
as you can see in blue they hedged it all out! I don't understand why
- if they lost the nerve of their models and overode it or what.
I was on realtime record here of systematically liquidating in
stepwise fashion during the crash, and then getting back in with two
fisted (although stepwise) enthusiasm in the rebound. I don't
understand why funds whose job is to do that cannot, and throw away
money. Maybe it is because with other peoples money you lose your
nerve to stand up to criticism for doing right. So that is why I
conceded to the OP that you might as well go along with index funds
until you have the interest and knowledge to trade yourself.
Granted, I do hate having to watch and switch sectors (usually
geographic ones rather than industry types) and juggle allocation
levels, but no active manager seems to do the obvious moves. I even
got criticism here for selldowns then buybacks because of costs in
commissions, but preserving capital in a downturn of indeterminate
depth and longevity is of supreme importance to those not on fat-cat
I also took complaints years earlier (maybe under different handle)
for claiming or even dreaming to outperform sp500. So I have made note
of example plays in real time here, such as well timed buying then
selling of commodities. And pointed out the stratospheric performances
done by others on record with similar trend following approaches. But
I would concede in this "planning" forum that you cannot plan on
overperforming - only strive for it, if you so choose.
Profitable active investing is very feasible. Unfortunately it is hard
to have this done for you. If you do it as an amateur, I don't think
it pays to battle sp500 on it's own terms (large cap domestic) because
the professionals know these too well. Consider more fringe things
like small cap (see outperformance on fundx chart) or foreign stocks
or commodities, etc. But first take years of just watching and testing
your instincts against reality over cycles, or at least making small
"> But it appears you missed his tripling up to 2000 and then zeroing
"> Profitable active investing is very feasible. Unfortunately it is
So why not just follow the Moose with a portion of your portfolio?