4 ms·

It's a bit controversial but there's a lot of evidence that actively managed funds underperform passive ones. "A Random Walk Down Wall Street"[0] is a good read

It's a bit controversial but there's a lot of evidence that actively managed funds underperform passive ones. "A Random Walk Down Wall Street"[0] is a good read on the topic. [0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

riffraff 5y ago
An interesting read is also the well known SPIVA report. It's not flawless, but it's quite obvious many hedge funds are not working for you as much as they work for themselves. Which is also what the guy in the article says, incidentally. https://www.spglobal.com/spdji/en/research-insights/spiva/ https://www.spglobal.com/spdji/en/research-insights/spiva/
22c 5y ago
Yes, I've read similar stories and of course Buffet is famous for saying things along similar lines. For me, I decided to follow Steve Clark's advice of "Do More of What Works and Less of What Doesn't". I invested in a bunch of different things including ETFs, managed funds, futures, individual stock picks, IPOs, etc. and I found managed funds that seemed to work better than ETFs (though 5 years is not really enough time to know for sure), so I pumped more into the managed funds that were working. Investing only in IPOs seems to work well as well but the hardest part for me was knowing when to sell (which in my case I almost never sell and I often miss the best opportunity to cash out my IPO investments). I am sure there are some bad managed funds, probably more bad ones than good ones. I'm certainly not saying managed funds are a better choice overall than just going "all-in" on Vanguard, but picking out a few managed funds to try out after doing a couple of hours research is also not a strategy that should be completely written off either, at least in my experience.
- didibus 5y ago
  One issue with managed funds is that the people in charge of managing can rotate, so a managed fund doing well now in 10 years could be like a whole different fund, since the employees in charge of managing it could have all changed.
  - 22c 5y ago
    Agreed. I know the names of the fund managers I'm invested in and would pay close attention if they ever changed.
smabie 5y ago
The real takeaway from this is not that it's impossible to beat the market consistently (it's not) or that the price movement of securities are random and normally distributed (they're not), but that as an average retail investor (or sometimes as a sophisticated institutional allocator), it is very difficult to find funds that can outperform (which isn't a linear/one dimensional thing btw, more sophisticated analysis is required) that also you can invest in. When allocating capital to funds you are being adversely selected against: those who can generate returns probably aren't interested in your money (there's a lot more money in the world than profitable trading/investment opportunities). As such, I normally recommend to people that unless they are professionals and know that they are doing or HNW (say >50mil), they stick to ETFs for the bulk of their portfolio. To be clear this isn't the optimal strategy, but it's easy and it mostly works.
- galaxyLogic 5y ago
  > it's impossible to beat the market consistently (it's not) Is there any proof of that? Some traders of course will get very rich, just like some lottery-players.
  - csee 5y ago
    > Is there any proof of that? Some traders of course will get very rich, just like some lottery-players. If we're talking about short-term traders, yes. There's firms and traders that make money almost every day of the year. If we're talking about investors with 4 week+ holding periods, then I agree the evidence is much more flimsy and the luck explanation (or risk premium explanation) can apply very often (or all the time).
  - Panzer04 5y ago
    Look up renaissance technologies. More quant than typical investing, but it proves that beating the market is possible
    - mmmrk 5y ago
      I recently read an interesting German article on them (use Google Translate if necessary) and they paint a more nuanced picture of Renaissance. https://www.gerd-kommer-invest.de/der-beste-fonds-aller-zeiten/ https://www.gerd-kommer-invest.de/der-beste-fonds-aller-zeit...
m101 5y ago
All funds, on average, get the market return. The certain difference with actively managed ones is that they charge a fee, and may pay more in liquidity costs. It's not surprising therefore most underperform. In investing, the first thing you have an influence on is avoiding fees (go passive). The second thing you have an influence on is time (remain invested).

riffraff 5y ago

An interesting read is also the well known SPIVA report. It's not flawless, but it's quite obvious many hedge funds are not working for you as much as they work for themselves. Which is also what the guy in the article says, incidentally. https://www.spglobal.com/spdji/en/research-insights/spiva/ https://www.spglobal.com/spdji/en/research-insights/spiva/

22c 5y ago

Yes, I've read similar stories and of course Buffet is famous for saying things along similar lines. For me, I decided to follow Steve Clark's advice of "Do More of What Works and Less of What Doesn't". I invested in a bunch of different things including ETFs, managed funds, futures, individual stock picks, IPOs, etc. and I found managed funds that seemed to work better than ETFs (though 5 years is not really enough time to know for sure), so I pumped more into the managed funds that were working. Investing only in IPOs seems to work well as well but the hardest part for me was knowing when to sell (which in my case I almost never sell and I often miss the best opportunity to cash out my IPO investments). I am sure there are some bad managed funds, probably more bad ones than good ones. I'm certainly not saying managed funds are a better choice overall than just going "all-in" on Vanguard, but picking out a few managed funds to try out after doing a couple of hours research is also not a strategy that should be completely written off either, at least in my experience.

didibus 5y ago
One issue with managed funds is that the people in charge of managing can rotate, so a managed fund doing well now in 10 years could be like a whole different fund, since the employees in charge of managing it could have all changed.
- 22c 5y ago
  Agreed. I know the names of the fund managers I'm invested in and would pay close attention if they ever changed.

smabie 5y ago

The real takeaway from this is not that it's impossible to beat the market consistently (it's not) or that the price movement of securities are random and normally distributed (they're not), but that as an average retail investor (or sometimes as a sophisticated institutional allocator), it is very difficult to find funds that can outperform (which isn't a linear/one dimensional thing btw, more sophisticated analysis is required) that also you can invest in. When allocating capital to funds you are being adversely selected against: those who can generate returns probably aren't interested in your money (there's a lot more money in the world than profitable trading/investment opportunities). As such, I normally recommend to people that unless they are professionals and know that they are doing or HNW (say >50mil), they stick to ETFs for the bulk of their portfolio. To be clear this isn't the optimal strategy, but it's easy and it mostly works.

galaxyLogic 5y ago
> it's impossible to beat the market consistently (it's not) Is there any proof of that? Some traders of course will get very rich, just like some lottery-players.
- csee 5y ago
  > Is there any proof of that? Some traders of course will get very rich, just like some lottery-players. If we're talking about short-term traders, yes. There's firms and traders that make money almost every day of the year. If we're talking about investors with 4 week+ holding periods, then I agree the evidence is much more flimsy and the luck explanation (or risk premium explanation) can apply very often (or all the time).
- Panzer04 5y ago
  Look up renaissance technologies. More quant than typical investing, but it proves that beating the market is possible
  - mmmrk 5y ago
    I recently read an interesting German article on them (use Google Translate if necessary) and they paint a more nuanced picture of Renaissance. https://www.gerd-kommer-invest.de/der-beste-fonds-aller-zeiten/ https://www.gerd-kommer-invest.de/der-beste-fonds-aller-zeit...

m101 5y ago

All funds, on average, get the market return. The certain difference with actively managed ones is that they charge a fee, and may pay more in liquidity costs. It's not surprising therefore most underperform. In investing, the first thing you have an influence on is avoiding fees (go passive). The second thing you have an influence on is time (remain invested).