Interact with Dave Ramsey's Online Community

This online community is a place where people:
  • Feel comfortable asking questions about specific money situations
  • Make personalized plans for individual situations
  • Motivate each other to keep reaching goals
  • Pay off thousands of dollars in debt!
My Total Money Makeover Community
Decrease font size
Increase font size
Topic Title: American Funds vs. Index Funds: The real deal.
Topic Summary: Shows that active managers can outperform the indexes in down or up markets..
Created On: 02/09/2008 01:35 PM
1
2
3
4
5
Next
Last unread
Search Topic Search Topic
Topic Tools Topic Tools
View topic in raw text format. Print this topic.
 02/09/2008 01:35 PM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007


With all of the talk about managed vs. index funds I wanted to do a little analysis of the funds over the past 10 years. What I did was take American Funds as the managed fund and index funds from Fidelity, T Rowe Price, Vanguard, and DFA. The numbers i used for American Funds were after all fees and expenses and I used the most expensive load possible (even though I and others here don't pay close to the maximum funds).

Before doing it certain things should be assumed or expected:

Since some people here argue that expenses are the biggest indicator of return I would expect for AF to have a few well performing funds but for the most part they should be ranked near the bottom and below their "peer group" when looking at returns compared to funds with similar risk levels because expenses for these funds are high and while you may get "lucky" for a couple, most should not outperform their peers.
Along with what was written above since 70% or more of the managed funds fail to outperform their indexes I would expect maybe 30% of the managed funds to exceed their "peer group" and 70% of the index funds to out earn their peer group because their fees are lower.
I broke up the funds into 3 different groups based on the type of fund they are: Large Value, Large Blend, and Large Growth.
I used 11 AF funds, 11 Vanguard Funds, 9 Fidelity Funds, 10 T Rowe Price Funds, and 6 DFA Funds
Over the last 10 years the S&P returned 3.93% annually over a 10 year period and only 1 Vanguard Fund and 1 T Rowe Price Funds failed to achieve at least a 3.93% return.

After looking at the analysis a few things were concluded:

Based on peer group returns:
11 out of 11 American Funds equaled or beat the avg returns of their peers.
6 out of 6 DFA Funds equaled or beat the avg returns of their peers.
2 out of 9 Fidelity Funds failed to beat the avg returns of their peers.
1 out of 10 T Rowe Funds failed to beat the avg returns of their peers.
4 out of 11 Vanguard Funds failed to beat the avg returns of their peers.


Looking at risk adjusted performance the AF CWGIX was the best fund overall with a 12.12% return and a 12.67 std deviation score. Arguably the other best would be the DFEMX with a 14.35% return, but with much much higher risk.


Taking the type of fund into account:
Large Blend:

Symbol--St Dev.--10yr%--Peer 10yr%-- Com.--Peer Diff.
DFEMX----22.92--14.35----13.02----------DFA***1.33
VEIEX-----24.14--13.68----13.02---------VAN***0.66
AEPGX----14.69--10.39----7.34----------AF****3.05
ANWPX---14.83--10.37----4.83----------AF****5.54
ANCFX----13.72--8.48-----5.03----------AF****3.45
VGTSX----15.5---7.21-----7.13----------VAN**0.08
AIVSX----11.95---7--------5.03----------AF***1.97
FSIIX------15.26 --6.41----7.13----------FID**-0.72
AMRMX----10.85 --6.32----6.32----------AF****0
AWSHX----12.75 --5.97----5.03---------AF****0.94
VBINX------8.9----5.62----4.88---------VAN***0.74
FSTMX-----15.39 --4.89----5.63----------FID***-0.74
VTSMX-----15.34--4.89----5.63---------VAN**-0.74
VPACX-----17.44--4.57----8.48--------VAN**-3.91
VPACX-----17.44--4.57----8.48--------VAN**-3.91
VFINX------14.87--4.4-----4.02---------VAN***0.38
DFLCX------14.84--4.36----4.02---------DFA***0.34
FSMKX------14.86--4.36---4.02----------FID***0.34
FUSEX------14.86--4.35---4.02-----------FID***0.33
PREIX------14.86---4.2----4.02----------TRO**0.18
PRGIX------14.09--3.92---5.63----------TRO**-1.71

Winners:
DFEMX (High return but higher risk)
VEIEX, (High return, but higher risk)
ANWPX (Good return, with lower risk)
AEPGX (Good return with lower risk)
ANCFX (Good return with lower risk)

Overall - 3 AF, 1 DFA, and 1 Vanguard

Losers:
PRGIX (Poor return for the risk)
PREIX (Poor return for the risk)
FUSEX (Poor return for the risk)
DFLCX (Poor return for the risk)
FSMKX (Poor return for the risk)

Overall - 2 T Rowe, 2 Fidelity, 1 DFA

For the risk of all the losers you would have seen much higher returns for every single AF. In fact the worst AF that was a large blend would have been 5.97% with much less risk than any of the other "losers" above.

On to the Large Growth Funds:

Symbol--St Dev.--10yr%--Peer10yr%---Com.--Peer Diff.
AGTHX----17.32---10.06---4.56--------AMERICAN***5.5
PRGSX----15.54---8.23----5.6----------T ROWE*****2.63
FDGRX----24.45---7.8-----4.63----------FIDELITY****3.17
TRSGX----11.11---6.79---4.88-----------T ROWE****1.91
TRPBX----8.56----6.66----4.88-----------T ROWE****1.78
ANEFX----18.9----6.34 ----4.56----------AMERICAN***1.78
PRGFX----16.14---5.81----3.16----------T ROWE****2.65
FGIOX----14.56---5.18----3.16----------FIDELITY***2.02
TRBCX----16.31--4.32----3.16-----------T ROWE***1.16
FLCSX-----16-----4.17-----3.16----------FIDELITY***1.01
VIGRX----16.57---3.3-----3.16----------VANGUARD*0.14

Winners:
AGTHX (Good return for the risk level)
PRGSX (Good Return for the risk level)
TRPBX (Good return for the risk level)

Overall - 1 AF, 2 TRowe Funds

Losers:
FDGRX (Too low of a return for that high of a risk)
VIGRX (Too low of a return for that risk level)
FLCSX (Too low of a return for that risk level)
TRBCX (Too low of a return for that risk level)

Overall - 2 Fidelity, 1 Vanguard, and 1 T Rowe

Overall these did not do too well. Large Blend was a much better investment than Large Growth

Finally the Large Value Funds:

Symbol---St Dev.--10 yr %--Peer 10yr%- Com.--Peer Diff.
CWGIX-----12.67---12.12----9.87---------AMERICAN***2.25
DFIVX-----15.22----10.36----7.77---------DFA*********2.59
CAIBX-----8.04-----9.06-----4.91--------AMERICAN****4.15
DFUVX-----16.44 ---7.73-----6.47--------DFA*********1.26
DFCVX-----16.43---7.63-----6.47----------DFA*********1.16
DFLVX-----16.44----7.59----6.47----------DFA*********1.12
AMECX-----8.21----7.57-----4.91---------AMERICAN****2.66
VEURX-----16.03---7.15-----9.01---------VANGUARD***-1.86
TRVLX-----15.46---7.14-----5.63--------T ROWE******1.51
PRFDX-----12.96---6.84-----5.66---------T ROWE******1.18
PRFDX-----12.96---6.84-----5.66---------T ROWE******1.18
FEQTX-----14.19---5.73-----5.66----------FIDELITY*****0.07
VIVAX-----15.1-----5.66-----5.08--------VANGUARD***0.58
FEQIX-----14.36----5.54-----4.02---------FIDELITY*****1.52

Winners:
CWGIX (Simply the best fund overall for the risk level)
DFIVX (Very good return for the risk level)
CAIBX (Very good return for the risk level)
AMECX (Good return for the risk level)

Overall - 3 AF and 1 DFA

Losers:
FEQIX (Too low of a return for that risk level)
VIVAX (Too low of a return for that risk level)
FEQTX (Too low of a return for that risk level)

Overall 2 Fidelity and 1 Vanguard

All 3 classifications overall:
Winners:
AF - 6 Winners
T Rowe - 2 Winners
Vanguard 1 Winner
DFA - 2 Winners (Only had 6 funds though, so 33%)
Fidelity - 0

Losers:
AF - 0 Losers
T Rowe - 3 Losers
Vanguard - 2 Losers
DFA - 1 Loser
Fidelity - 6 Losers

Conclusion:

The worst AF would be ANEFX (Large Growth Fund) which returned 6.34% with a Std Deviation of 18.9, but it still outearned its peers by 1.8% after the most expensive fees.

So which funds were the best at outearning its peers:

Well 6 out of the top 7 were AF:
ANWPX (5.54% more than its peers)
AGTHX (5.5%)
CAIBX (4.15%)
ANCFX (3.45%)
AEPGX (3.05%)
AMECX (2.66%)

The one other one was FDGRX (3.17%)from Fidelity coming in at #5 of the spread between what it earned and what its peers earned.

Overall Vanguard was the worst at outearning its peers with its best fund only outearning its peer by 0.74%.


If expenses are the best indication of what is to come (return %)relative to group/type and/or risk level then why did AF pretty much stomp the competition, except for DFA, which IMO it was as good as? If expenses were truly the indicator and the fees on AF are overpriced then we should have seen a few AF near the top (for luck reasons), but most near the bottom. However, not 1 did worse than its peers and the worst fund you could find from AF was one that beat its peers by 1.8%.

Edit: If I missed any funds from any of the companies please let me know and I will add them in.

Edit Part 2: For those that think I "cherry picked' AF I used every single fund that was a "Large" fund. I left none out.

Edited: 06/03/2008 at 03:39 PM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/11/2008 10:26 AM
User is offline Print this message


MyTMMO User
TMMO Guru

Posts: 268
Joined: 01/04/2007


I knew there was a reason I felt pretty good about sticking with American Funds for everything outside my 401k. I knew the overall returns were there, but hadn't sat down to quantify how they compared to the index funds.

And, once you get over the $100k breakpoint the loads are not nearly so bad (3.5%). I look forward to hitting the $1million breakpoint where the loads go to 0%.
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/11/2008 06:00 PM
User is offline Print this message


MyTMMO User
Plastic Surgeon, here's my card...

Posts: 864
Joined: 10/02/2006


You must be single. If not wow, your poor wife.. does she ever see you..

just kidding.. thank you for taking the time to put this together..

I look foward to the banter from the usual suspects that will follow..

yes, you know who you are...
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/11/2008 08:37 PM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007




You must be single. If not wow, your poor wife.. does she ever see you..



just kidding.. thank you for taking the time to put this together..



I look foward to the banter from the usual suspects that will follow..



yes, you know who you are...



I actually had done most of the research before when I was deciding where to invest.

You don't have to worry about the usual suspects. They won't show up. Where irrefutable data is posted they can have nothing to say, so they have chosen to ignore me. The reason for this post is I wanted to show how you have to look at things as they are and not collectively as a group. I believe the statistic is that 70% of index funds outperform their peer group as a whole or their managed fund counterparts. Kind of ironic how AF seems to fall into that 30% with pretty much every single fund they have.

Edited: 02/11/2008 at 08:40 PM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/12/2008 08:58 AM
User is offline Print this message


MyTMMO User
TMMO Guru

Posts: 250
Joined: 09/01/2005


As an investment advisor, I've always had the philosophy to not put my client's money into investments that I may have to apologize for later. This is the reason why I've literally added millions upon millions to the American Funds.

The American Funds back up their talk. Never trying to be the biggest the winner, but always among the leaders.

Well done Mike... There is a reason why the American Funds is the number one fund family offered by advisors.

I only wish I had as much time as Mike does... lol

Again, well done!
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/12/2008 03:23 PM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007


This is one of my posts from another thread that I thought I would share in this thread.

"There's no getting around it, American Funds are good funds. I guess I just wonder if they will continue to be good funds since active management is the means of their good returns. Now that doesn't mean they won't perform well, and obviously they have performed well in the past, but how will they perform in the future.

In the case of index funds we can get a good feel of what will most likely happen in the future since the method in determing what stocks will be in the index funds doesn't change. I like that a lot. To me it adds another dimension of stability to my investment strategy; knowing that the method is consistent my asset allocation will be consistant and then my investment plan will not be altered by some active manager. To me that is ideal, maybe for others that isn't as important. In my thinking people who invest in active funds are more comfortable with a gambling mentality (not criticizing, just a thought and an observation). Why else would you want to take the extra chance of allowing someone to try to time the market and use some of the other strategies that, more often than not, fail? Again, I don't want that to come across as a criticism, but simply as a thought and an observation (whether it is correct or not)."

God Bless.

Jason
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/12/2008 08:10 PM
User is offline Print this message


MyTMMO User
Certified Gazelle

Posts: 353
Joined: 04/07/2006


There was a pretty good book publised in 2004 about Capital Group Companies (That is the company that owns Ameican Funds) and how they manage money. The book, "Captial: The Story of Long-Term Investment Excellence" was written by Charles D. Ellis.

Info on the book can be found at this website

Here is a synopsis from the publisher:
"The Capital Group is one of the worlds largest investment management organizations, but little is known about it because the company has shunned any type of publicity. This compelling book, for the first time, takes you inside one of the most elite and private investment firms out there-the Capital Group Companies-a value investment firm par excellence. It digs deeps to reveal the corporate culture and long-term investment strategies that have made Capital the one organization where most investment professionals would like to work and would most recommend as long-term investment managers for their family and friends."
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/13/2008 09:31 AM
User is offline Print this message


MyTMMO User
Living like no one else

Posts: 616
Joined: 08/13/2006


Bobbyp,

Thank you for the info on the book. I'll have to think about buying it. Its cheaper on Amazon. My library doesn't carry that book, but has
Winning the Loser's Game
by the same author.

Synopsis:
Q: "What can I do to beat the markets?"

It's one of today's most often asked questions. And the answer, maddening in both its simplicity and its complexity, is simple: Instead of playing the loser's game of trying to "beat the markets," enjoy winning investing by learning how to get the markets to work for you.

Through three previous editions of Winning the Loser's Game, Charles Ellis has shown investors how the markets really work and why most investors are their own worst enemies. Relying on simple data and historical facts, Ellis argues that the most successful investors avoid short-term traps to concentrate on long-term strategies that allow time, compounding, and the natural ebbs and flows of the markets to work their magic.

Charles Ellis has 40 years of experience working with the leading investment organizations around the world and is in the unique position to tell it like it is. Winning the Loser's Game provides dozens of sound ideas on how to be a smarter investor, and for plugging the leaks in your investment returns. From preventing unnecessarily high taxes to avoiding unconscionably high fees, this common-sense guidebook for independent investors reveals how to:

* Match your investment program to the realities of the market and work effectively with your investment managers
* Make the most of the "unfair" index fund advantage in today's tumultuous market environment
* Keep from getting burned by the market's inevitable up-and-down cycles
* Institute an annual review process that includes both your and your heirs' lifelines
* Maximize financial success through five stages, from Earning, Saving, and Investing through Estate Planning and Giving

In today's markets, an unprecedented quarter-century of performance has blinded investors to the historical base rate of investment returns. Winning the Loser's Game cuts through the fog like a beacon of common sense and clarity, and helps you to see how today's most highly touted shortcuts and secrets are almost always guaranteed to hurt you in the long run. With updated facts and figures and six new chapters, it sidesteps complications and formulas to provide you with the straight-talking secrets to winning investing.
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/13/2008 06:20 PM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007




In today's markets, an unprecedented quarter-century of performance has blinded investors to the historical base rate of investment returns. Winning the Loser's Game cuts through the fog like a beacon of common sense and clarity, and helps you to see how today's most highly touted shortcuts and secrets are almost always guaranteed to hurt you in the long run. With updated facts and figures and six new chapters, it sidesteps complications and formulas to provide you with the straight-talking secrets to winning investing.


DaBears,

Did you write that yourself or did you copy and paste it from somewhere else?
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/13/2008 09:38 PM
User is offline Print this message


MyTMMO User
Certified Gazelle

Posts: 353
Joined: 04/07/2006


Here is some additional information about Mr. Ellis:

"CHARLES D. ELLIS is a recognized expert on investment management. For thirty years, he was managing partner of Greenwich Associates, the leading worldwide strategy consultant to the investment industry, where he developed close working relationships with senior executives at most of the major investment firms in the United States, Canada, England, Japan, Germany, and Australia. His other activities have included teaching the investment management course at both the Yale School of Management and Harvard Business School; and chairing the CFA Institute. He currently serves as a Director of Vanguard; advising some of the world's largest Investing institutions; and chairing the investment committees at the Whitehead Institute and Yale University. Among his ten prior books is Winning the Loser's Game. He is one of only ten individuals honored for lifetime contributions to the investment management profession. "

Mr. Ellis knows the investment management business better than most people out there. He clearly illustrates that the folks over at American Funds and Captial Research have been, and continue to be among the leaders in the money management business for over 70 years.

From the inside flap of the book:
"Through interviews with dozens of current and former executives as well as years of in-depth research, Ellis explains the organizational culture and long-term investment strategies that have helped Capital achieve superior investment results and grow globally. You'll learn why Capital excels in the mutual fund business with its American Funds and how it pioneered in discovering investment opportunities in emerging markets."
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/13/2008 10:52 PM
User is offline Print this message


MyTMMO User
Living like no one else

Posts: 616
Joined: 08/13/2006


Oh... I copied it from the information on the Barnes and Noble page on this book, thats the link in my post. Guess I should of made that more clear.
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/14/2008 09:24 AM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007


That's ok I was just going to brag on you a little if you did write it, because it sounded like something a journalist wrote.
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/14/2008 09:32 AM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007


You had me until:



In my thinking people who invest in active funds are more comfortable with a gambling mentality (not criticizing, just a thought and an observation). Why else would you want to take the extra chance of allowing someone to try to time the market and use some of the other strategies that, more often than not, fail? Again, I don't want that to come across as a criticism, but simply as a thought and an observation (whether it is correct or not)."

God Bless.

Jason


Let us look at the 9 least riskiest funds (the least amount of what you called "gambling mentality", or taking on more of a chance)

CAIBX
AMECX
TRPBX
VBINX
AMRMX
TRSGX
AIVSX
CWGIX
AWSHX

6 out of the top 9 took on the least amount of risk or the the investor had less of a gambling mentality by investing in American Funds.

I read it best somewhere else. Index funds you are buying a fund with no manager or management team looking out for you. Managed funds at least give you a chance of someone looking out for you

BTW of those 9 funds with the lowest risk level the 4 best performing funds of those 9 were CWGIX (AF), CAIBX (AF), AMECX (AF), and AIVSX (AF). Hmmmm. All American Funds.

This goes to show the inherent flaws with studies and/or overall data rather than focused data. To put it in terms that most can understand it would be like saying that the doctor's make more money than salesmen so you should always become a doctor (financially speaking). Well there are many salesmen that make much more than doctors do and while overall the statement may be true you need to look at specific instances to get a true picture.

Even looking at DFA funds (which I think are the best here out of the index funds) you can see that there were 9 AF that had less risk than the lowest risk DFA fund. Of those 9 that were lower risk than the DFA fund ALL 9 OUTEARNED IT

Edited: 02/14/2008 at 09:49 AM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/14/2008 02:44 PM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007





This goes to show the inherent flaws with studies and/or overall data rather than focused data.


Mike you are trying to claim that Nobel Laureates and numerous stock market researchers from highly esteemed universities don't know how to perform accurate studies. With all due respect I don't agree with that at all.

Also, there isn't a good way to compare actively managed funds with index funds, because actively managed funds can change their asset mix. e.g. CAIBX "Normally, at least 50% of assets will be invested in common stocks of large, established companies with proven records of increasing dividends. May also invest in preferred stocks, convertibles, bonds and cash." "May invest up to 50% of assets outside the U.S."

How do you compare a fund that can change it's asset mix to that degree to an index fund that doesn't change it's asset mix? And how do you know the actual amount of risk involved in a fund whose asset mix can fluctuate to that degree?

God Bless

Jason
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/14/2008 04:51 PM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007








This goes to show the inherent flaws with studies and/or overall data rather than focused data.




Mike you are trying to claim that Nobel Laureates and numerous stock market researchers from highly esteemed universities don't know how to perform accurate studies. With all due respect I don't agree with that at all.



Also, there isn't a good way to compare actively managed funds with index funds, because actively managed funds can change their asset mix. e.g. CAIBX "Normally, at least 50% of assets will be invested in common stocks of large, established companies with proven records of increasing dividends. May also invest in preferred stocks, convertibles, bonds and cash." "May invest up to 50% of assets outside the U.S."



How do you compare a fund that can change it's asset mix to that degree to an index fund that doesn't change it's asset mix? And how do you know the actual amount of risk involved in a fund whose asset mix can fluctuate to that degree?



God Bless



Jason


I am claiming that using a whole group to identify one group is faulty AND I PROVED IT. If a person comes to you and says should I invest in managed funds or index funds the answer can vary. If you take the managed funds as a whole then statistically speaking you are right that index funds return more for the risk level. If you take AF then you are wrong.

You took more risk and returned less by investing in your index funds as shown above.

There is absolutely a good way to compare index funds to managed funds. It is called risk assessment. You think your 100% U.S. index fund had less risk than my CAIBX fund? It did not. It does not matter if it is intl, U.S., etc. Risk is risk.

Who cares about asset mix? You should care about the riskiness of your investment. If I can maximize return and minimize risk I couldn't care less where the company is located. A risky company in the U.S. is more risky than a non risky company abroad.

Every single good investor wants to minimize risk by maximizing returns. By investing in index funds you are choosing not to do that. By investing in AF you would be choosing to do that. This is fact (at least over the last 10 years)and not arguable. It is shown above with the numbers.

You talked about the gambling mentality. Well my friend you are the gambler. You are taking on more risk for your return than need be.

2 things matter to investors (or should):

1) Return - This is the most important thing. You are looking to maximize your return.

2) Risk - This is what comes in next. You look at your return and find a risk level that you are comfortable with.

Looking at the data above you may have wanted to invest in an index fund that would have given you 10% return over a 10 year period. You could only have invested in a couple DFA funds or a Vanguard fund, but would have had to take on significant amounts of risk.

Because your flawed philosophy does not believe in index funds you passed up the opportunity to invest in AF funds that were much lower risk (almost half) and returned over 10%.

When a study says that 70% of managed funds underperform their peers and/or the market yet 100% of a family of funds disproves it there is a flaw in the study. Period.

I will wait for you to find me the AF that shows that this study was flawless.

All that study says is that there are a lot of bad managed funds, yet my data seems to show that there are no bad AF, or at least no bad funds relative to the most popular index funds.

There isn't a good way to compare index vs. managed? Are you freaking kidding? The way you compare them is to see who outperformed their peers by the most and look at the risk levels and see which performed best at various risk levels.

After seeing the FACTUAL data posted above though you can have no argument on how any index funds are better than AF.

In fact please let me know why and which index funds you would invest in over the AF funds listed above.

I can tell you there is only one you even have a remote possibility of being able to back up. DFEMX. The only reason would be that you are looking to maximize return and you don't care about risk. Every other one underperformed compared to an AF.

I will flat out speak the facts:

American Funds have outperformed the comparative index funds with less risk long term and they have been doing it for 30 years. The numbers do not lie.


I hear the same things from the index only investing people:

1) Don't compare returns to the S&P 500 , but to the peer funds and you will see that index outperform managed. WRONG AS SHOWN ABOVE.

2) The extra expenses will bring down the returns of managed funds leading to indexes outperforming managed funds. WRONG AS SHOWN ABOVE.

3) Expenses and allocation are the best way to predict future returns. WRONG AS SHOWN ABOVE.

4) For similar risk levels indexes outperform their managed counterparts. WRONG AS SHOWN ABOVE.

Anything else the index people want to argue so I can prove that wrong as well?

Edited: 02/14/2008 at 05:44 PM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/15/2008 01:32 PM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007


Mike,

First of all, calm down. I don't try to argue my point to win the arguement but to see who is correct. I invest in index funds because they hold to a certain asset class and don't change and because of that I can set up my own asset allocation within my portfolio.

It does matter when you compare a fund that invests in international funds along with U.S. funds with a fund that invests in only U.S. large cap growth funds. How are those even comparable? It would be like claiming that my oranges taste better than your apples.

If you don't like what people who extensively study the market say about indexing then we can't discuss indexing vs. managed funds. I feel like you don't want to consider the studies by "Nobel Laureates and numerous stock market researchers from highly esteemed universities." You feel that the above information disproves what these esteemed people have found; I disagree.

On a different note, I do not feel like you are stupid or anyone else is stupid for investing in American funds. You have obviously proven by the information given that they are good funds. Lets just agree to disagree.

God Bless.

Jason
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/15/2008 02:04 PM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007




Mike,



First of all, calm down. I don't try to argue my point to win the arguement but to see who is correct. I invest in index funds because they hold to a certain asset class and don't change and because of that I can set up my own asset allocation within my portfolio.



It does matter when you compare a fund that invests in international funds along with U.S. funds with a fund that invests in only U.S. large cap growth funds. How are those even comparable? It would be like claiming that my oranges taste better than your apples.



If you don't like what people who extensively study the market say about indexing then we can't discuss indexing vs. managed funds. I feel like you don't want to consider the studies by "Nobel Laureates and numerous stock market researchers from highly esteemed universities." You feel that the above information disproves what these esteemed people have found; I disagree.



On a different note, I do not feel like you are stupid or anyone else is stupid for investing in American funds. You have obviously proven by the information given that they are good funds. Lets just agree to disagree.



God Bless.



Jason



I did not mean to come off as harsh so I am sorry if I did. The biggest misconception IMO that people have is the whole intl vs. U.S. The reason most people steer away from intl is that it is usually riskier. It makes no sense to say that you are willing to accept a lower return for a higher risk fund that is a U.S. fund vs. a higher return with lower risk fund that has some intl holdings. It makes no sense.

It would be like saying that I would be willing to play blackjack with my money in the U.S. rather than invest in something else overseas because it is U.S. based. Risk is what matters and not holdings. holdings as they relate to risk do of couse matter. The reason people diversify is for risk diversification and to capture returns of what is performing and nothing more.

What you are not realizing is that there is a way to compare funds. It is by comparing returns to peer funds. By looking at a peer return rate you can see how your fund did relative to the same types of funds with the same types of holdings.

I am not saying above that AF A is better than Vanguard Fund B just because it outearns it(Although that is one reason), but I am saying that AF are better because they are outearning peer funds better than the indexes and doing it with less risk.

My question to you or anyone else would be "Why are you investing in riskier things than you need to when you could achieve the same returns for significantly less risk."

It would be like seeing a ticket to an event that you like and not buying it so that you could take the risk of going to the show and finding a scalper that will sell you a worse seat for more.

A so called experts answer on why he would not buy AF is that he refuses to pay a commission. So in essence he is saying: I will take more on risk and earn less long term. In the words of DR "That is STOOOPID!!".

I am on neither side but the data's. If there was data out there that showed I could get higher returns by investing in index funds vs. AF and a higher return I would switch in a heartbeat.

SO again, why would you, or anyone else, invest in riskier funds for less return and for returns that outearn peer funds by a lesser margin?

The best anyone can come up with is that a certain % of the time indexes do outearn their peer managed funds. That would be like showing a study that 70% of women drive better than men so I guess every single woman drives better than every single man.

The only reason I come up with for anyone would be that they were not aware that AF performed this well and now that they know they are beginning to think things over.

If you disagree that the above data does not disprove what these guys have to say then no offense but you cant read. If it is published that 1+1=2 and you find a study that says differently and you agree with the study then you are foolish.

Since you also don't agree with the data above then you HAVE TO be able to point out the flaw. WAITING FOR YOU TO POINT OUT THE FLAW.

I disagreed with the statements from the studies and I did what is called "PROVING IT".

Edited: 02/15/2008 at 02:07 PM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/15/2008 02:54 PM
User is offline Print this message


MyTMMO User
Better than I deserve

Posts: 299
Joined: 02/15/2007


I think we are attempting to invest in a similar manner but are using different means to achieve the performance we would like to see. The idea is that I am not investing in one fund because it performs well, but am investing in a large array of funds to obtain the proper diversification and then my overall portfolio will perform better. That is why I put such a premium on having a U.S. large cap fund be invested in U.S. large cap stocks. If you can't count on your U.S. large cap fund to invest in U.S. large cap stocks then you can't obtain the proper diversification and therefore cannot determine the level of risk you are actually taking.

With the proper diversification I am lessening my risk level therefore overall the risk level is lower.

I'm not saying that there is anything wrong with the above study, outside of the risk level given to the funds, but I am saying that the above study does not disprove the other research that has been done. I think the conclusion you come to isn't proven by the limited amount of research that you did (not trying to discredit the work you did because you obviously put a lot of time into the research).

Also, I have a hard time believing that we can adequately compare index funds to funds that can change their asset mix in the manner that American funds can. Again, I think it is like comparing apples to an orange. Probably more like comparing an apple to a fruit that is a combination of an apple and an orange.

Something else I want to mention is that I believe you are taking additional risk when investing in actively managed funds because the fund manager can change the asset mix. If you can't be sure of the asset mix the fund will have, then you can't determine how diverse your portfolio is. If a fund can invest up to 50% in international funds then that definitely changes the level of risk being taken. I see that you don't feel the same way, but I do. I want to determine how much I have invested outside of the U.S. instead of my fund manager. You mentioned that it doesn't matter if it's U.S. or international large cap, but there are professionals who think it does matter. I feel more comfortable with index funds and feel that if I have a consistent investment strategy then I will do good. I also beleive the same for someone who invests in actively managed funds. The reason I choose index funds is because I feel like I can have a more consistent investment strategy by investing in them. I don't know for sure, without a doubt that my index funds will outperform your actively managed funds over the next 5-10 years. But research does indicate that over a longer time period that the performance of index funds will be harder for an actively managed fund to beat. I recognize that you feel that AF will beat index funds, and it doesn't bother me, they potentially can.

I won't be able to reply any more today so if it takes me a while to get back with you it is because I have some plans for the weekend.

God Bless.

Jason
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/15/2008 03:34 PM
User is offline Print this message


MyTMMO User
I am Dave

Posts: 2470
Joined: 01/16/2007




I think we are attempting to invest in a similar manner but are using different means to achieve the performance we would like to see. The idea is that I am not investing in one fund because it performs well, but am investing in a large array of funds to obtain the proper diversification and then my overall portfolio will perform better. That is why I put such a premium on having a U.S. large cap fund be invested in U.S. large cap stocks. If you can't count on your U.S. large cap fund to invest in U.S. large cap stocks then you can't obtain the proper diversification and therefore cannot determine the level of risk you are actually taking.


Yes you can determine it. You can look and see the risk levels. I put the numbers corresponding to the risk levels. You still make no sense by saying I will take on 4 (or however many) riskier investments because I know what they are, rather than 4 less risky investments because they may change a little (even after the change they are less risky).



With the proper diversification I am lessening my risk level therefore overall the risk level is lower.


Your risk may be less than it was initially but it is still more risk than diversified AF. If diversifying index funds reduces risk then so does diversifying managed funds so that statement again makes no sense, or it makes sense but makes no sense in why you would choose index funds over AF.



I'm not saying that there is anything wrong with the above study, outside of the risk level given to the funds, but I am saying that the above study does not disprove the other research that has been done. I think the conclusion you come to isn't proven by the limited amount of research that you did (not trying to discredit the work you did because you obviously put a lot of time into the research).


No it absolutely disproves the study when looking a exact and focused funds. The study is good in an overall picture, but horrible when looking at specifics. Why would you ever invest using an overall example? You should always look at specifics. In fact you contradict yourself by investing in specific index funds, but refuse to look at specific managed funds.



Also, I have a hard time believing that we can adequately compare index funds to funds that can change their asset mix in the manner that American funds can. Again, I think it is like comparing apples to an orange. Probably more like comparing an apple to a fruit that is a combination of an apple and an orange.


If you can't understand looking at peer funds is how you can compare then you honestly need to learn about finance more and I mean it in the nicest possible way. That is what you are paying for when you buy a managed fund. For them to manage and move into the better sectors and/or companies and out of the dogs.



Something else I want to mention is that I believe you are taking additional risk when investing in actively managed funds because the fund manager can change the asset mix. If you can't be sure of the asset mix the fund will have, then you can't determine how diverse your portfolio is. If a fund can invest up to 50% in international funds then that definitely changes the level of risk being taken. I see that you don't feel the same way, but I do.


Well your feeling is WRONG. Risk can be measured. You can feel that there is more risk being taken but the numbers do not lie. Go learn about beta, r-squared, alpha, std deviation, etc. to understand that you can absolutely measure risk and it as nothing to do where a company is headquartered.

I want to determine how much I have invested outside of the U.S. instead of my fund manager. You mentioned that it doesn't matter if it's U.S. or international large cap, but there are professionals who think it does matter. I feel more comfortable with index funds and feel that if I have a consistent investment strategy then I will do good. I also beleive the same for someone who invests in actively managed funds. The reason I choose index funds is because I feel like I can have a more consistent investment strategy by investing in them.


You actually have a less consistent strategy as shown by standard deviation. Consistency (or volatility) is measured by std. deviation.


I don't know for sure, without a doubt that my index funds will outperform your actively managed funds over the next 5-10 years. But research does indicate that over a longer time period that the performance of index funds will be harder for an actively managed fund to beat. I recognize that you feel that AF will beat index funds, and it doesn't bother me, they potentially can.


They have been doing it for 30 years and you think it will be different these next 5 years? Research only indicates that as a whole it may be true, but arguing that research shows it is the case when talking specifically about AF is ignorant (uninformed).



I won't be able to reply any more today so if it takes me a while to get back with you it is because I have some plans for the weekend.



God Bless.



Jason


There is nothing to reply to. Not one of your points was solid. Believe me I looked into all of this before I decided to invest. My data is as solid as a rock. Pick any 10 year period within the last 30 years and the data looks relatively the same. I would rather just hear people say they did not know about all of the data, did not know how to look at it, don't have time to go thru it, and say they invest in index funds because they are dummy proof and very little research is needed. What I can't stand to hear is that the expenses always eat up the returns and managed funds can't outearn index funds unless they take on more risk, etc. and nobel prize professionals have proved it. If that is the case, then wow, I just proved nobel prize winners wrong as it corresponds to AF. For the record the nobel prize winners proved that as a whole it may be true.

Edited: 02/15/2008 at 03:50 PM by MyTMMO User
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
 02/15/2008 08:58 PM
User is offline Print this message


MyTMMO User
Plastic Surgeon, here's my card...

Posts: 864
Joined: 10/02/2006






I think we are attempting to invest in a similar manner but are using different means to achieve the performance we would like to see. The idea is that I am not investing in one fund because it performs well, but am investing in a large array of funds to obtain the proper diversification and then my overall portfolio will perform better. That is why I put such a premium on having a U.S. large cap fund be invested in U.S. large cap stocks. If you can't count on your U.S. large cap fund to invest in U.S. large cap stocks then you can't obtain the proper diversification and therefore cannot determine the level of risk you are actually taking.




Yes you can determine it. You can look and see the risk levels. I put the numbers corresponding to the risk levels. You still make no sense by saying I will take on 4 (or however many) riskier investments because I know what they are, rather than 4 less risky investments because they may change a little (even after the change they are less risky).







With the proper diversification I am lessening my risk level therefore overall the risk level is lower.




Your risk may be less than it was initially but it is still more risk than diversified AF. If diversifying index funds reduces risk then so does diversifying managed funds so that statement again makes no sense, or it makes sense but makes no sense in why you would choose index funds over AF.







I'm not saying that there is anything wrong with the above study, outside of the risk level given to the funds, but I am saying that the above study does not disprove the other research that has been done. I think the conclusion you come to isn't proven by the limited amount of research that you did (not trying to discredit the work you did because you obviously put a lot of time into the research).




No it absolutely disproves the study when looking a exact and focused funds. The study is good in an overall picture, but horrible when looking at specifics. Why would you ever invest using an overall example? You should always look at specifics. In fact you contradict yourself by investing in specific index funds, but refuse to look at specific managed funds.







Also, I have a hard time believing that we can adequately compare index funds to funds that can change their asset mix in the manner that American funds can. Again, I think it is like comparing apples to an orange. Probably more like comparing an apple to a fruit that is a combination of an apple and an orange.




If you can't understand looking at peer funds is how you can compare then you honestly need to learn about finance more and I mean it in the nicest possible way. That is what you are paying for when you buy a managed fund. For them to manage and move into the better sectors and/or companies and out of the dogs.







Something else I want to mention is that I believe you are taking additional risk when investing in actively managed funds because the fund manager can change the asset mix. If you can't be sure of the asset mix the fund will have, then you can't determine how diverse your portfolio is. If a fund can invest up to 50% in international funds then that definitely changes the level of risk being taken. I see that you don't feel the same way, but I do.




Well your feeling is WRONG. Risk can be measured. You can feel that there is more risk being taken but the numbers do not lie. Go learn about beta, r-squared, alpha, std deviation, etc. to understand that you can absolutely measure risk and it as nothing to do where a company is headquartered.



I want to determine how much I have invested outside of the U.S. instead of my fund manager. You mentioned that it doesn't matter if it's U.S. or international large cap, but there are professionals who think it does matter. I feel more comfortable with index funds and feel that if I have a consistent investment strategy then I will do good. I also beleive the same for someone who invests in actively managed funds. The reason I choose index funds is because I feel like I can have a more consistent investment strategy by investing in them.




You actually have a less consistent strategy as shown by standard deviation. Consistency (or volatility) is measured by std. deviation.





I don't know for sure, without a doubt that my index funds will outperform your actively managed funds over the next 5-10 years. But research does indicate that over a longer time period that the performance of index funds will be harder for an actively managed fund to beat. I recognize that you feel that AF will beat index funds, and it doesn't bother me, they potentially can.




They have been doing it for 30 years and you think it will be different these next 5 years? Research only indicates that as a whole it may be true, but arguing that research shows it is the case when talking specifically about AF is ignorant (uninformed).







I won't be able to reply any more today so if it takes me a while to get back with you it is because I have some plans for the weekend.







God Bless.







Jason




There is nothing to reply to. Not one of your points was solid. Believe me I looked into all of this before I decided to invest. My data is as solid as a rock. Pick any 10 year period within the last 30 years and the data looks relatively the same. I would rather just hear people say they did not know about all of the data, did not know how to look at it, don't have time to go thru it, and say they invest in index funds because they are dummy proof and very little research is needed. What I can't stand to hear is that the expenses always eat up the returns and managed funds can't outearn index funds unless they take on more risk, etc. and nobel prize professionals have proved it. If that is the case, then wow, I just proved nobel prize winners wrong as it corresponds to AF. For the record the nobel prize winners proved that as a whole it may be true.


You may be trying to be nice Mikef07 but I can help but tell you that you come off as EXTREMELY arrogant.. unless you are Kreskin you this is debate is subjective at best... People need to start posting there investments completely and then be quiet for a few years. Then let your portfolio do the talking... As I have said somewhere else.. everybody is a genius in theory....
Would you like to contribute to this conversation? Learn How : Link To : Top : Bottom
Statistics
There are currently 39 users logged in.

 

FuseTalk Enterprise Edition - © 1999-2014 FuseTalk Inc. All rights reserved.