Index funds - what are your experiences?

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
costs overall)
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
will be
distributed to myself and siblings before the end of this year.
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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.
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Bill Woessner
Read "The Only Guide to a Winning Investment Strategy That You'll Ever Need" by Larry Swedroe not so much for what he says but for all of the citations to academic research on index funds.
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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 next.
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 and preparation.
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 index funds.
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Or for new-age types allergic to books and partial to videos, I think at least lecture 4 of
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great insights on portfolios, and how mutual funds aren'tsupposed to be stock pickers at all, but rather risk and returnmodulators.
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 case.
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On Fri, 19 Nov 2010 08:47:38 CST, Bill Woessner wrote:
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.
Reply to
HW "Skip" Weldon
Index funds are some of the most honest Wall Street inventions. A great way to invest. My kids' UTMA money is 100% in a couple of stock index funds.
Reply to
Igor Chudov
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.
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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:
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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):
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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 funds.
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.
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It is fundx.
Based on my arithmetic, it looks like the moose site performance is about 17.3% annualized, quite good for 14 years.
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you actually have a couple of questions... the last not being really addressed.
Large Inheritence... 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 -
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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
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. Their reason-for-being is toliquidate on downturns, which they failed to do, and reinvest onupturns, 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):
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.But look at the period after the 2009 crash. Their stock returns havebeen fabulous (in purple) giving many times the sp500 bounceback, butas 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 salaries.
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 commitments.
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"> But it appears you missed his tripling up to 2000 and then zeroing
"> Profitable active investing is very feasible. Unfortunately it is hard
So why not just follow the Moose with a portion of your portfolio?
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