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Coffee Break has a great video about Index Funds: https://www.youtube.com/watch?v=_vdB7gphtyo https://www.youtube.com/watch?v=_vdB7gphtyo The TL;DW is that in

Coffee Break has a great video about Index Funds: https://www.youtube.com/watch?v=_vdB7gphtyo https://www.youtube.com/watch?v=_vdB7gphtyo The TL;DW is that in many different studies, index funds preform better in the very long term than almost any managed fund. Why pay some monkeys to manage your money when an even distribution over a bunch of common stocks does just as well?

bluGill 8y ago
Two points in favor of paying someone. First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market) After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.
- AnimalMuppet 8y ago
  Re beating the index: Here's a bunch of managed funds that try to beat the index. Some do better, some do worse - say, 50/50. The next year, half do better, half do worse, and it's (for the most part) unrelated to the year before. So now you have 25% of the funds having beaten the index two years in a row. As you said, very few managed funds beat the index year after year. But even for those funds, the question is, will they beat the index next year with greater than 50% probability? I'm not sure that any of them will.
  - bluGill 8y ago
    One year is far too small a time period. I'm only interested in are funds that over a 10 year period have beat the index. A good manager will have good and bad years. One or two years of doing worse than the index are perfectly fine with me. Unfortunately after about 10 years the manager tends to retire, so just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well.
    - jldugger 8y ago
      > just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well. This seems like a testable hypothesis. If experience pays dividends, or if novices pay a penalty, you'd expect to find this to persist over time.
      - bluGill 8y ago
        That is an interesting hypothesis, but it isn't the one I was suggesting. I was suggesting that the rare great manager regardless of experience will do well over long time periods. Those managers do not pass their experience/knowledge on to those who take over from them.
        jldugger 8y ago
        I'm not sure great fund managers exist at all. I'm sure you can find a few emphatically bad ones, I guess. For whatever rare managers who do well over long periods of time, why isn't that knowledge transferable? I can think of two possibilities: 1. They have had an incredible run of luck. When you have process with randomness baked in, and thousands of managers, someone is expected to beat the average 10 years in a row. 2. A well cultivated network of insider information, or other nefarious means. Madoff claims to have started his Ponzi scheme in the early 90's, and it took multiple decades for that to be uncovered. Similarly, Cornblum and Grmovsek took 14 years to be discovered.
- scarface74 8y ago
  If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Say your goal is to have a mix of stocks/bonds/cash that gets more conservative the closer you get to retirement. Would an actively manage fund on average beat a fund with the same mix of investments where each component was an index?
  - bluGill 8y ago
    Maybe. In the case of bonds there is more room for an active manager - some bonds are riskier than others, so it is easier to be a good bond manager, which just means read the actual data behind the bond and decide which are going to go bankrupt and which will pay off. (In theory ratings agencies do this, but being 1% better than the agency is enough and you can do that just be splitting the agency categories into more levels) Of could you must be an expert at bonds to do this. However I don't want to sped a large amount of time managing my accounts. A fund that always comes in at just less than what the index would is worth it just because I don't have to think. Not thinking is in fact an import part of my investment plan. People who don't think about their investments too much don't make as many bad decisions. https://www.businessinsider.com/forgetful-investors-performed-best-2014-9 https://www.businessinsider.com/forgetful-investors-performe...

bluGill 8y ago

Two points in favor of paying someone. First, most funds have goals other than beating the index, so if the index is your goal we should ignore them. However why is the index your goal? If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Second, of those that attempt to match/beat the index, some of them do beat the index year after year. IF you can get in one of them you are better off. Note that IF is in all caps - this is a big if, very few managed funds beat the index on a regular basis. However if some fund manager beats the index year after year, that manager ought to be worth a lot of money to you (so long as after expenses he beats the market) After considering the above, most of my money is in a target date retirement fund with a low expense ratio. I know I'm not going to beat the index, but as I get older they balance things. I know someone invested all in an index who retired right before a crash, the crash combined with his withdrawals to live cut his principal enough that he is now broke. (I suspect he didn't have enough savings to retire in other than best case scenarios, but even so his required capital to retire is higher in a stock index). I do have some play money in an index fund, if things go well I'll retire early on that cash, if things go bad, at least my normal retirement is not in trouble.

AnimalMuppet 8y ago
Re beating the index: Here's a bunch of managed funds that try to beat the index. Some do better, some do worse - say, 50/50. The next year, half do better, half do worse, and it's (for the most part) unrelated to the year before. So now you have 25% of the funds having beaten the index two years in a row. As you said, very few managed funds beat the index year after year. But even for those funds, the question is, will they beat the index next year with greater than 50% probability? I'm not sure that any of them will.
- bluGill 8y ago
  One year is far too small a time period. I'm only interested in are funds that over a 10 year period have beat the index. A good manager will have good and bad years. One or two years of doing worse than the index are perfectly fine with me. Unfortunately after about 10 years the manager tends to retire, so just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well.
  - jldugger 8y ago
    > just as we finally learn which funds are worth the price a new manager takes over, and new managers have a tendency to not do as well. This seems like a testable hypothesis. If experience pays dividends, or if novices pay a penalty, you'd expect to find this to persist over time.
    - bluGill 8y ago
      That is an interesting hypothesis, but it isn't the one I was suggesting. I was suggesting that the rare great manager regardless of experience will do well over long time periods. Those managers do not pass their experience/knowledge on to those who take over from them.
      - jldugger 8y ago
        I'm not sure great fund managers exist at all. I'm sure you can find a few emphatically bad ones, I guess. For whatever rare managers who do well over long periods of time, why isn't that knowledge transferable? I can think of two possibilities: 1. They have had an incredible run of luck. When you have process with randomness baked in, and thousands of managers, someone is expected to beat the average 10 years in a row. 2. A well cultivated network of insider information, or other nefarious means. Madoff claims to have started his Ponzi scheme in the early 90's, and it took multiple decades for that to be uncovered. Similarly, Cornblum and Grmovsek took 14 years to be discovered.
scarface74 8y ago
If you are far away from retirement (or whatever your reason for investing is), then the index is a good goal, but as you get closer to retirement you need to have an asset allocation that won't drop in value right when you need the money. The index will not do that for you. Say your goal is to have a mix of stocks/bonds/cash that gets more conservative the closer you get to retirement. Would an actively manage fund on average beat a fund with the same mix of investments where each component was an index?
- bluGill 8y ago
  Maybe. In the case of bonds there is more room for an active manager - some bonds are riskier than others, so it is easier to be a good bond manager, which just means read the actual data behind the bond and decide which are going to go bankrupt and which will pay off. (In theory ratings agencies do this, but being 1% better than the agency is enough and you can do that just be splitting the agency categories into more levels) Of could you must be an expert at bonds to do this. However I don't want to sped a large amount of time managing my accounts. A fund that always comes in at just less than what the index would is worth it just because I don't have to think. Not thinking is in fact an import part of my investment plan. People who don't think about their investments too much don't make as many bad decisions. https://www.businessinsider.com/forgetful-investors-performed-best-2014-9 https://www.businessinsider.com/forgetful-investors-performe...