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i read somewhere when comparing a financial advisor, managing one's portfolio vs an index fund - There was no discernible higher return with the advisor managed

i read somewhere when comparing a financial advisor, managing one's portfolio vs an index fund - There was no discernible higher return with the advisor managed portfolio vs the index fund.

deleted 7y ago
[deleted]
beatgammit 7y ago
An index fund typically performs much better over any meaningful timeframe because it has much lower fees. But that's not the point here. The big money in investing isn't in beating the market, but charging fees, so fund managers only need to convince people to give them their money, they don't actually have to deliver results, provided they're working within the fund's stated goals.
nightski 7y ago
That's not true at all! There are many instances of managed portfolios greatly outperforming index funds. There are also examples of them greatly under performing. The crux is picking the right one - which is similar to the point you are making but not the same.
- lotsofpulp 7y ago
  Has any managed portfolio outperformed SPY over last 30 years after accounting for expenses?
  - bdkoepke 7y ago
    Sure, equal weight split between SPY, EFA, EEM, VNQ. 7.7% real return with 17.7% vol vs 7.1% real return with 17.1% vol. Sharpe for equal weight: 0.435; Sharpe for SPY: 0.415
  - nightski 7y ago
    Yes, see Renaissance Technologies Medallion Fund* which earned their employees a 66% annualized return (39% after fees) over 30 years. It's one of the most well known examples out there. [1] https://en.wikipedia.org/wiki/Renaissance_Technologies https://en.wikipedia.org/wiki/Renaissance_Technologies
    - lotsofpulp 7y ago
      I meant those open to the public.
baron_harkonnen 7y ago
While this has been true in the past, because of this advice, huge amounts of wealth are now in index tracking etfs or similar passive index tracking funds. This essentially means that a larger and larger amount of the market is just “betting in the market”. If you want to spot where the next financial crisis will come from a generally good idea is not to ask “what looks crazy right now” (ie VC funding) but “what does essentially nobody question that is also a major change in mainstream investing”. Because everyone is doubling down on investing on the status quo, don’t be surprised if a disruption to the status quo has far more dramatic impact than it would have 20 years ago.
- chii 7y ago
  the wrong assumption is that the large bets on ETFs are "wrong" for extended periods. If the ETFs are incorrectly pricing assets because of blind buying, then an enterprising managed index fund could bet against it. Or, find some other arbitration mechanism. But of course, this doesn't actually happen, because price discovery _still happens_ even if ETFs account for a large percentage of trades (since price discovery can happen even with small number of trades). And if ETFs is just betting on the market average, then the worst that can happen is they get average results. ETFs don't use leverage or debt.
chiph 7y ago
If the trend continues of index fund growth as a percentage of the market, then the remaining active investors will gain an outsized influence on market direction. This is because index fund managers make very few trades on their own initiative, relying on market stats (trade history) to direct their own trades. Those market stats are built on the recent trades made by active investors. If (when!) there is a correction, there will be analysis done on the cause (pick one or more of: student loan debt, sub-prime auto loans, trade war, something else) and then new investment strategies will be devised. And maybe passive investing will be shown to leave you vulnerable to a sea-change.

i read somewhere when comparing a financial advisor, managing one's portfolio vs an index fund - There was no discernible higher return with the advisor managed portfolio vs the index fund.

deleted 7y ago

[deleted]

beatgammit 7y ago

An index fund typically performs much better over any meaningful timeframe because it has much lower fees. But that's not the point here. The big money in investing isn't in beating the market, but charging fees, so fund managers only need to convince people to give them their money, they don't actually have to deliver results, provided they're working within the fund's stated goals.

nightski 7y ago

That's not true at all! There are many instances of managed portfolios greatly outperforming index funds. There are also examples of them greatly under performing. The crux is picking the right one - which is similar to the point you are making but not the same.

lotsofpulp 7y ago
Has any managed portfolio outperformed SPY over last 30 years after accounting for expenses?
- bdkoepke 7y ago
  Sure, equal weight split between SPY, EFA, EEM, VNQ. 7.7% real return with 17.7% vol vs 7.1% real return with 17.1% vol. Sharpe for equal weight: 0.435; Sharpe for SPY: 0.415
- nightski 7y ago
  Yes, see Renaissance Technologies Medallion Fund* which earned their employees a 66% annualized return (39% after fees) over 30 years. It's one of the most well known examples out there. [1] https://en.wikipedia.org/wiki/Renaissance_Technologies https://en.wikipedia.org/wiki/Renaissance_Technologies
  - lotsofpulp 7y ago
    I meant those open to the public.

baron_harkonnen 7y ago

While this has been true in the past, because of this advice, huge amounts of wealth are now in index tracking etfs or similar passive index tracking funds. This essentially means that a larger and larger amount of the market is just “betting in the market”. If you want to spot where the next financial crisis will come from a generally good idea is not to ask “what looks crazy right now” (ie VC funding) but “what does essentially nobody question that is also a major change in mainstream investing”. Because everyone is doubling down on investing on the status quo, don’t be surprised if a disruption to the status quo has far more dramatic impact than it would have 20 years ago.

chii 7y ago
the wrong assumption is that the large bets on ETFs are "wrong" for extended periods. If the ETFs are incorrectly pricing assets because of blind buying, then an enterprising managed index fund could bet against it. Or, find some other arbitration mechanism. But of course, this doesn't actually happen, because price discovery _still happens_ even if ETFs account for a large percentage of trades (since price discovery can happen even with small number of trades). And if ETFs is just betting on the market average, then the worst that can happen is they get average results. ETFs don't use leverage or debt.

chiph 7y ago

If the trend continues of index fund growth as a percentage of the market, then the remaining active investors will gain an outsized influence on market direction. This is because index fund managers make very few trades on their own initiative, relying on market stats (trade history) to direct their own trades. Those market stats are built on the recent trades made by active investors. If (when!) there is a correction, there will be analysis done on the cause (pick one or more of: student loan debt, sub-prime auto loans, trade war, something else) and then new investment strategies will be devised. And maybe passive investing will be shown to leave you vulnerable to a sea-change.