4 ms·

Compared to index funds, actively managed mutual funds still stink

46 points by MilnerRoute 2y ago

mattgreenrocks 2y ago
Fidelity’s been nagging me to come in and talk with them recently to make sure my index fund portfolio is “performing well.” Am I correct in guessing this discussion likely doesn’t have my best interests at heart?
- chii 2y ago
  They need to sell you more products. Passive index investors are the worst type of customer, because they tend to be careful about their spend, expense ratios and understand what they're buying! So make sure you are the worst type of customer.
- js2 2y ago
  It's fine to have it, but you can also tell them you're managing your own retirement and they'll back off. In my experience, it starts with them just making sure you have a plan. You can use their web-based free retirement planning tool to do that yourself: https://www.fidelity.com/what-we-offer/planning https://www.fidelity.com/what-we-offer/planning I'm not sure how it progresses after that if you keep talking to them. AFAIK though, they just want to make sure you're aware of everything that Fidelity offers. Some discussions here: https://www.bogleheads.org/forum/viewtopic.php?t=349342 https://www.bogleheads.org/forum/viewtopic.php?t=349342 https://www.bogleheads.org/forum/viewtopic.php?t=420550 https://www.bogleheads.org/forum/viewtopic.php?t=420550
- csomar 2y ago
  Yes. The alpha in "high-finance" is in the sale. Your sale is their alpha and your loss.
- readthenotes1 2y ago
  I knew someone who let Fidelity manage hen's money. It gave access to some funds that aren't available to the hoi polloi but I don't remember what the fee was. In this case, it was also the service of "I don't want to think about money so I'll pay you to do it" in the nouveau riche way of trying mimic the aristocrats who needn't dirty their hands with it
- kube-system 2y ago
  Despite these headlines, there are reasons that someone may want to rebalance their portfolio. Performance over time is not everything -- for instance, it is often advisable for someone approaching retirement to rebalance into investments that are lower performing but more less volatile. An S&P 500 index fund might give a reliable 20 year performance, but if you're cashing out next year, you're gambling on somewhere between a -40% and +60% return. This is all to say, just because you have money in index funds doesn't necessarily mean they're the right index funds for your situation.
  - bluGill 2y ago
    Just remember that as you near retirement odds are you have more than 10 years left - don't rebalance too far out of high preforming index funds
  - thunky 2y ago
    > if you're cashing out next year, you're gambling on somewhere between a -40% and +60% return This is true but it's not a great idea to cash out all at once. Better to de-risk gradually, and only sell small lots when you need to fund expenses.
UltraSane 2y ago
If you let someone invest money for you they should have a fiduciary duty to you. Otherwise they are just trying to take your money via fees.
jandrewrogers 2y ago
It is hard to not notice that most of the actively managed funds that consistently do well are almost if not entirely their own customers exclusively. Management fees and performance hit differently in these cases. It should be a lesson about incentives as much performance.
JKCalhoun 2y ago
https://archive.ph/Ceo5u https://archive.ph/Ceo5u
geor9e 2y ago
It always baffles me when my highly paid engineering coworkers refuse to manage their own investment portfolios and insist that a professional needs to do it. All you have to do is buy a Vanguard index fund ETF at Interactive Brokers or something similar. They have such agency and competence in everything else, but think finances are unknowable. Even just a 0.5% fee adds up to a huge percentage of your net worth gone after a few decades.
- chii 2y ago
  The thing is, contrary to normal expectations, experts in financial investments don't come with expected increase in returns. You surely don't normally expect people to be their own doctors, or electricians, or any sort of professional work themselves (other than their own field). And yet, it is not the case for financial investment. This is counterintuitive, despite being absolutely true. But without decent exposure to the literature and education about it, it is very easy to not know or find it baffling that a low cost index fund is the optimal for the average person. Not to mention the myriad of tiktoks and finfluencers claiming otherwise!
  - danielmarkbruce 2y ago
    Hmm i wrote almost the exact same thing at the exact same time...
  - lostmsu 2y ago
    This is wrong for most professions except doctors, who actually can't be their own doctors for obvious reasons.
    - geor9e 2y ago
      >who actually can't be their own doctors for obvious reasons. Is it weird that I, thought by many to be a smart and worldly person, have zero clue what any of those "obvious" reasons would be? I have an engineering degree and I'd be my own engineer. I might get second opinions, i.e. chit chat with co-workers, but not for everything.
- 2y ago
AnotherGoodName 2y ago
Mutual funds have a lot of risk aversion, they even keep some of your money in cash. This poor performance shines through in the up years since the risk aversion wasn't needed in hindsight. They'll do better than index funds in down years but we haven't had one of those in a while now. That's ultimately all this is. The fees are similar really but if one puts something like 50% in stocks, 30% in bonds, 10% overseas and 10% in cash while the other puts 100% in stocks the stocks will win if stocks alone were the best investment. That has been true since 2008 but may not always be true.
deleted 2y ago
[deleted]
timonoko 2y ago
Index funds are the worst. Everytime they hit the motherload, they have to sell it early on, so that the portfolio stays "balanced". You cannot have a fund that has 95% Nvidia, it is (probably) against the law.
- markisus 2y ago
  I thought it was the opposite of what you’re saying. Index funds buy more of stocks that are higher. And why would a 95 percent NVIDIA be against the law? It just wouldn’t be an index fund.
  - timonoko 2y ago
    It seems to work so. Both Nokia and Nvidia started to disappear when they hit the 30% mark. Might depend on the country too. -- "Index Fund" is often run by robots and exempt from some curbs and cautions.
- archagon 2y ago
  Maybe there’s a good reason for that. For example, NVDA’s performance has been highly erratic since their initial AI-fueled bump.

46 points by MilnerRoute 2y ago

Fidelity’s been nagging me to come in and talk with them recently to make sure my index fund portfolio is “performing well.” Am I correct in guessing this discussion likely doesn’t have my best interests at heart?

chii 2y ago
They need to sell you more products. Passive index investors are the worst type of customer, because they tend to be careful about their spend, expense ratios and understand what they're buying! So make sure you are the worst type of customer.
js2 2y ago
It's fine to have it, but you can also tell them you're managing your own retirement and they'll back off. In my experience, it starts with them just making sure you have a plan. You can use their web-based free retirement planning tool to do that yourself: https://www.fidelity.com/what-we-offer/planning https://www.fidelity.com/what-we-offer/planning I'm not sure how it progresses after that if you keep talking to them. AFAIK though, they just want to make sure you're aware of everything that Fidelity offers. Some discussions here: https://www.bogleheads.org/forum/viewtopic.php?t=349342 https://www.bogleheads.org/forum/viewtopic.php?t=349342 https://www.bogleheads.org/forum/viewtopic.php?t=420550 https://www.bogleheads.org/forum/viewtopic.php?t=420550
csomar 2y ago
Yes. The alpha in "high-finance" is in the sale. Your sale is their alpha and your loss.
readthenotes1 2y ago
I knew someone who let Fidelity manage hen's money. It gave access to some funds that aren't available to the hoi polloi but I don't remember what the fee was. In this case, it was also the service of "I don't want to think about money so I'll pay you to do it" in the nouveau riche way of trying mimic the aristocrats who needn't dirty their hands with it
kube-system 2y ago
Despite these headlines, there are reasons that someone may want to rebalance their portfolio. Performance over time is not everything -- for instance, it is often advisable for someone approaching retirement to rebalance into investments that are lower performing but more less volatile. An S&P 500 index fund might give a reliable 20 year performance, but if you're cashing out next year, you're gambling on somewhere between a -40% and +60% return. This is all to say, just because you have money in index funds doesn't necessarily mean they're the right index funds for your situation.
- bluGill 2y ago
  Just remember that as you near retirement odds are you have more than 10 years left - don't rebalance too far out of high preforming index funds
- thunky 2y ago
  > if you're cashing out next year, you're gambling on somewhere between a -40% and +60% return This is true but it's not a great idea to cash out all at once. Better to de-risk gradually, and only sell small lots when you need to fund expenses.

UltraSane 2y ago

If you let someone invest money for you they should have a fiduciary duty to you. Otherwise they are just trying to take your money via fees.

jandrewrogers 2y ago

It is hard to not notice that most of the actively managed funds that consistently do well are almost if not entirely their own customers exclusively. Management fees and performance hit differently in these cases. It should be a lesson about incentives as much performance.

JKCalhoun 2y ago

https://archive.ph/Ceo5u https://archive.ph/Ceo5u

geor9e 2y ago

It always baffles me when my highly paid engineering coworkers refuse to manage their own investment portfolios and insist that a professional needs to do it. All you have to do is buy a Vanguard index fund ETF at Interactive Brokers or something similar. They have such agency and competence in everything else, but think finances are unknowable. Even just a 0.5% fee adds up to a huge percentage of your net worth gone after a few decades.

chii 2y ago
The thing is, contrary to normal expectations, experts in financial investments don't come with expected increase in returns. You surely don't normally expect people to be their own doctors, or electricians, or any sort of professional work themselves (other than their own field). And yet, it is not the case for financial investment. This is counterintuitive, despite being absolutely true. But without decent exposure to the literature and education about it, it is very easy to not know or find it baffling that a low cost index fund is the optimal for the average person. Not to mention the myriad of tiktoks and finfluencers claiming otherwise!
- danielmarkbruce 2y ago
  Hmm i wrote almost the exact same thing at the exact same time...
- lostmsu 2y ago
  This is wrong for most professions except doctors, who actually can't be their own doctors for obvious reasons.
  - geor9e 2y ago
    >who actually can't be their own doctors for obvious reasons. Is it weird that I, thought by many to be a smart and worldly person, have zero clue what any of those "obvious" reasons would be? I have an engineering degree and I'd be my own engineer. I might get second opinions, i.e. chit chat with co-workers, but not for everything.
2y ago

AnotherGoodName 2y ago

Mutual funds have a lot of risk aversion, they even keep some of your money in cash. This poor performance shines through in the up years since the risk aversion wasn't needed in hindsight. They'll do better than index funds in down years but we haven't had one of those in a while now. That's ultimately all this is. The fees are similar really but if one puts something like 50% in stocks, 30% in bonds, 10% overseas and 10% in cash while the other puts 100% in stocks the stocks will win if stocks alone were the best investment. That has been true since 2008 but may not always be true.

deleted 2y ago

[deleted]

timonoko 2y ago

Index funds are the worst. Everytime they hit the motherload, they have to sell it early on, so that the portfolio stays "balanced". You cannot have a fund that has 95% Nvidia, it is (probably) against the law.

markisus 2y ago
I thought it was the opposite of what you’re saying. Index funds buy more of stocks that are higher. And why would a 95 percent NVIDIA be against the law? It just wouldn’t be an index fund.
- timonoko 2y ago
  It seems to work so. Both Nokia and Nvidia started to disappear when they hit the 30% mark. Might depend on the country too. -- "Index Fund" is often run by robots and exempt from some curbs and cautions.
archagon 2y ago
Maybe there’s a good reason for that. For example, NVDA’s performance has been highly erratic since their initial AI-fueled bump.