Comments on: A Stroll Down Memory Lane http://www.keyfeeonly.com/a-stroll-down-memory-lane/ Opines on Investing, Financial Planning, Government Policy and the Media. Fri, 11 Jun 2010 19:20:31 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: Roger http://www.keyfeeonly.com/a-stroll-down-memory-lane/comment-page-1/#comment-1099 Roger Mon, 15 Jun 2009 20:24:09 +0000 http://www.keyfeeonly.com/?p=2577#comment-1099 Andrew, There have been studies looking at individual investors, and how well they have done. They tend to plow into a mutual fund after it has done well for a couple of years. Then they are disappointed when it does poorly. So they tend to <strong>buy high and sell low</strong>. One study found that individual investors who buy stocks do worse than investors who buy mutual funds. As for researching past patterns and modeling human behavior, good luck with that. Everyone would love to be able to predict the future. You have to see something in advance that no one else sees. And your timing must be very good. <strong>In reality everyone’s crystal ball is cloudy.</strong> As for Bill Gross, I admit that he is very smart and certainly articulate. Two years ago did you predict that he would do so well? Another Bill, Bill Miller had a wonderful record, until he didn’t. Anyone who invested in his mutual fund after it got a lot of publicity has done very poorly. Roger Andrew,

There have been studies looking at individual investors, and how well they have done. They tend to plow into a mutual fund after it has done well for a couple of years. Then they are disappointed when it does poorly. So they tend to buy high and sell low.

One study found that individual investors who buy stocks do worse than investors who buy mutual funds.

As for researching past patterns and modeling human behavior, good luck with that. Everyone would love to be able to predict the future. You have to see something in advance that no one else sees. And your timing must be very good. In reality everyone’s crystal ball is cloudy.

As for Bill Gross, I admit that he is very smart and certainly articulate. Two years ago did you predict that he would do so well?

Another Bill, Bill Miller had a wonderful record, until he didn’t. Anyone who invested in his mutual fund after it got a lot of publicity has done very poorly.

Roger

]]> By: Roger http://www.keyfeeonly.com/a-stroll-down-memory-lane/comment-page-1/#comment-1098 Roger Mon, 15 Jun 2009 20:02:58 +0000 http://www.keyfeeonly.com/?p=2577#comment-1098 Matthew, Yes the studies are based on averages, and yes some mutual funds did outperform. With thousands of funds in existence, you would expect some to do better than an index. The question is why <strong>so few </strong>have done better over any length of time. It’s not only theory, but simple arithmetic. On average, mutual funds will have the market return, <strong>before costs</strong>. After costs, they will have <strong>less than the market return</strong>. Because they have higher costs, actively managed mutual funds have a handicap. Most cannot overcome it. And it is almost impossible to predict which ones will outperform <strong>in advance</strong>. After the fact, sure you can point to the winners. But beforehand, I doubt that you or anyone else you know can do it. Of course, you’re welcome to try to identify future winners. But the odds are against you. Roger Matthew,

Yes the studies are based on averages, and yes some mutual funds did outperform. With thousands of funds in existence, you would expect some to do better than an index. The question is why so few have done better over any length of time.

It’s not only theory, but simple arithmetic. On average, mutual funds will have the market return, before costs. After costs, they will have less than the market return. Because they have higher costs, actively managed mutual funds have a handicap. Most cannot overcome it.

And it is almost impossible to predict which ones will outperform in advance. After the fact, sure you can point to the winners. But beforehand, I doubt that you or anyone else you know can do it.

Of course, you’re welcome to try to identify future winners. But the odds are against you.

Roger

]]> By: Andrew http://www.keyfeeonly.com/a-stroll-down-memory-lane/comment-page-1/#comment-1097 Andrew Mon, 15 Jun 2009 19:28:46 +0000 http://www.keyfeeonly.com/?p=2577#comment-1097 Nice article. However how do you explain the few very successful fund managers like Bill Gross? Hasn't PIMCO become an index almost in of itself? What are the historical comparisons between individuals selecting stocks from different sectors and picking funds from the same sectors. If we did a historical analysis of every 5% dip in stocks (or some other definable marker), researched their speculative causes and effects over the last 85 yrs could we remove the unpredictability of stocks? It seems to me we can now model human behaviour, because I have seen the same knee jerk reaction to different stimuli several times now, and I am wet behind the ears relatively speaking. In a knowledge economy, statistics could be very valuable. Nice article. However how do you explain the few very successful fund managers like Bill Gross? Hasn’t PIMCO become an index almost in of itself?

What are the historical comparisons between individuals selecting stocks from different sectors and picking funds from the same sectors. If we did a historical analysis of every 5% dip in stocks (or some other definable marker), researched their speculative causes and effects over the last 85 yrs could we remove the unpredictability of stocks?

It seems to me we can now model human behaviour, because I have seen the same knee jerk reaction to different stimuli several times now, and I am wet behind the ears relatively speaking. In a knowledge economy, statistics could be very valuable.

]]> By: Matthew Raden http://www.keyfeeonly.com/a-stroll-down-memory-lane/comment-page-1/#comment-1096 Matthew Raden Mon, 15 Jun 2009 18:54:32 +0000 http://www.keyfeeonly.com/?p=2577#comment-1096 Roger, So, in your opinion, Index funds have and will continue to outperform actively managed ones? One quibble: These studies are based only on averages. Averages do not reflect every fund's performance. There are a decent number of actively managed funds which have performed well. If your theory is correct, then there shouldn't be as many good funds as there are. There are definite tax advantages to Index funds as opposed to actively managed ones. However, this does not mean that actively managed funds should be totally absent from one's portfolio. Roger,

So, in your opinion, Index funds have and will continue to outperform actively managed ones?

One quibble: These studies are based only on averages. Averages do not reflect every fund’s performance. There are a decent number of actively managed funds which have performed well. If your theory is correct, then there shouldn’t be as many good funds as there are.

There are definite tax advantages to Index funds as opposed to actively managed ones. However, this does not mean that actively managed funds should be totally absent from one’s portfolio.

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