What you are talking about is asset allocation, risk profiling and time horizons. After the smoke clears: it is about investment performance that can attain those goals.

Have to disagree with this.  It's never about investment performance.  Sometimes, it is about investor performance, but this is very different than investment performance. 

The client with better investment performance, or investor performance, isn't necessarily the one with more money to spend in the future.  

Ex. Everything about Bob and Jack are identical except that Bob has a networth of 4.5 million.  Jack has 4.8 million.  Jack was able to accumulate more because Bob diverted money from investments into whole life insurance.  

Bob takes a single life pension of $8,000 a life from his company.  Jack has to take a joint life pension of $4,000 because he wants his wife to have the income if he dies.  (Bob wants the same thing, but it will come from the life insurance.)

Bob's total portfolio has done worse, but he gets to spend more money in retirement and leave more money behind at death.

It's not about returns.  It's about spendable dollars and accomplishing goals.

Vagabond and Looney, excellent points.

We need to act like sharks, though.

The win - win action item is more money for our clients, us and then the shareholders, in that order.

If we really want to get paid for what we do as advisors, we need to be more active in defining the game, top down.

Everything else is just fighting for scraps.

[quote=AllREIT] [quote=mikebutler222]I know the fans of passive management like to say that, and they like to base their claim on statistical studies that always involve the term "on average" (yet they love to ignore the above average outliers that are far more common than they like to concede), but it simply isn't so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don't reflect the typical results. [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.

[quote=AllREIT]

If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.

 [quote=AllREIT]

 The typical results of active mangement is underperformance. [/quote]

My suggestion, if you believe that, is avoid the “typical” advisor. On average, most of us can’t hit a 300 yard drive. OTOH, the PGA is filled with people who come very, very close to doing so on a regular basis. That’s the problem with using statistical evidence based on “averages”, especially when the advantage of indexes is as slight as you show below. Remember, even if you ignore the tracking errors involved in using funds, much less funds not attempting to “beat” an index, a “65%” outperform amounts to 15% above being “average”. Not much of an advantage and certainly not enough to make definitive pronouncements about the value of active management.

 [quote=AllREIT]

www.spiva.standardandpoors.com/

[quote]Over longer time periods, indices continue to exceed a majority ofactive funds. Over the past three years (and five years), the S&P 500 has beaten 65.7% (72.2%) of large-cap funds, the S&P MidCap 400 hasoutperformed 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap600 has outpaced 80.2% (77.7%) of small-cap funds. (Reports 1 to 5)[/quote]

The numbers get much worse over longer time spans. And perfomance skew makes this all much worse, since the beats tend to be small, and losses often impressive.



[/quote]

Sorry, but you’re once again using funds (with all the performance hurdles they face in the form of cash flows, illogical pool investor behavior, etc.. that SMA managers don’t) to base your claims. So, your  talk of “active managers” is even less accurate when all you’re describing are mutual fund active managers.

You must realize that you’re not presenting anything the vast majority of us aren’t familiar with in terms of  academic studies, right? It’s simply that most of us (as with the vast majority of trustees of genuine pools of money) don’t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.

You really have the zealotry of the converted on this subject. That’s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your “evidence” is riddled with truck-sized loop holes. IOW, your absolutist commentary isn’t supported well by your caveat-filled evidence.

I think one of the problems with our perception is the way we measure "successful" advisors. It's always the one's who made the most money, not for their clients but for themselves. MDRT, Top Producer, Gold Circle, etc. is all about the stockbroker/insurance agent, not his or her clients.

Can you imagine walking into your doctor's office and seeing a plaque on the wall that says "Dr. Smith made $350,000 last year". You'd probably rather see where doctor Smith traveled to Africa to work in a clinic for free (and paid his own way!).

Same with lawyers and pro bono work.

[quote=EDJ to RIA]

I think one of the problems with our perception is the way we measure "successful" advisors. It's always the one's who made the most money, not for their clients but for themselves. MDRT, Top Producer, Gold Circle, etc. is all about the stockbroker/insurance agent, not his or her clients.

Can you imagine walking into your doctor's office and seeing a plaque on the wall that says "Dr. Smith made $350,000 last year". You'd probably rather see where doctor Smith traveled to Africa to work in a clinic for free (and paid his own way!).

Same with lawyers and pro bono work.

[/quote]

Excellent points.

I don't see any registered investment advisors, or independent broker dealer affiliates, needing to give up some of their payout, so they can be patted on the back by some home office sales contest. There are plenty of red herrings, but quiet success speaks louder than winning some sales contest.

Do you think there is a correlation between winning sales contests and needing to make cold calls?

If a person wants to be a doctor, they learn from other doctors, they don't go to some bull pen and hack on practice bodies.

[quote=mikebutler222]

I submit most people trying to win business on �quality of work� arguement couldn�t if they told the truth, the whole truth and nothing but the truth. It�s only by shading the truth and cutting corners on all the qualifiers of the evidence they use to base their assertion that they attempt to make their case. [/quote]

All you need to make a "quality of work" argument is a client who is unhappy about the quality of work. If you do a good job, that won't be a problem. As an industry most clients of financial services are less than happy.

[quote=AllREIT]You and I both know that even if you ignore the 20% (and that survey�s based on MUTUAL FUND active managers, not �active managers�) that DO outperform the average (and why not, instead of accepting the average, use that 20%?)[/quote]

And can you pick that 20% ahead of time. All the time? Consistantly?

The future is random, and evidence for the persistance of outperformance is weak. Interestingly the evidence for persistance of underperformance is much stronger.

[QUOTE]the survey includes managers that aren�t even attempting to outperform the average because their aim is a lower beta, or income. It�s a wildly misleading claim. �In general� is a loop-hole you could drive a semi through.[/quote]

I just posted the SPIVA site, you can go look through over there. SPIVA is corrected for that by the use of appropriate benchmarks, correcting for survivorship bias (funds that suck get merged/liquidated) etc

[quote]
The Standard & Poor's Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry. SPIVA scorecards show both asset-weighted and equal-weighted averages, include survivorship bias correction to account for funds that may have merged or been liquidated during the period under study, and show style consistency for each style group across different time horizons.[/quote]

[quote]That claim has even less validity when you�re, for example, looking at managers that accurately should be benchmarked against other indexes, like those competing with the EAFE or the Russell 2000.[/quote]

You haven't read this quarters SPIVA report, have you?

Because again, your forgetting the part about appropriate benchmarks. Domestic funds vs domestic benchmarks and international vs international benchmarks.

[quote]Absolutists in the passive camp also never bother to attempt to tackle the fact that serious money in this country (endowments, trusts, pension plans) uniformly use active management and passive in a complimentary manner. Perhaps it�s because the they�re-crooks or they�re-foolish lines don�t ring as true when the targets are sophisticated trustees of large pools of money.[/quote]

There's a couple of flaws in your thinking.

1) Alot of the active management at "serious money" is really allocations to alternative investments. Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work.

Much of that active management comes in the form of "Global Macro" top down management and/or quant models. Both us

How do we know that "serious money uniformly use active management and passive in a complimentary manner"?

And what is serious money anyways? Just cause you have a slug of money (from whatever source) doesn't mean you know how to manage it or even know how to hire people to manage it.

[quote=AllREIT] Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest. [/quote]

As I said, you are impugning the integrity of your competition, and on very, very shaky empirical evidence. It�s amazing how often passive investment types try this �dishonest� route without bothering to detail to the client/prospect how many caveats there are in their �active managers under perform� claims. I�ve yet to see someone who uses solely active management or someone who employs both try to make the �dishonest� assertion about indexers.[QUOTE]

I just tell people:

1) Markets are effecient to the point where it is not profitable to try and beat them. You want the cheapest-to-deliver exposure to risk asset classes.

2) Historical results of active vs passive management show that long term, active management doesn't work.

2.5) The main area's of active management areas that work are.

a) Deep value
b) Private Equity
c) Venture Capital.
d) Some hedgefund strategies
e) Distressed investing ( which is 2nd cousin to deep value)

3) Asset allocation and risk budgeting are what you should worry about. 

4) Never ever buy an annuity.   

[quote=AllREIT]

You�re right about Hull, but I was thinking of the cartoon character Pogo and his assessment about who the real enemy is.[/quote]

I like Pogo,

[quote=mikebutler222]

[quote=AllREIT]

[quote=mikebutler222]I know the fans of passive management like to say
that, and they like to base their claim on statistical studies that
always involve the term “on average” (yet they love to ignore the above
average outliers that are far more common than they like to concede),
but it simply isn’t so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don’t reflect the typical results. [/quote]<o:p></o:p>

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.[/quote]

If lets's take that 1 year 20% in mind. In any given year the odds against you picking the lucky fund are 4:1 against.

I'd flip coins all day if you paid me 4:1.

But as you increase time horizon's the %age of outperformers and the cummulative extent of outperformance get less and less. Historical data shows that investment performance tends to be mean reverting.

And ofcourse, when Bill Miller started out you couldn't have know he was any good. As morningstar's investor weighted performance figures show, the typical investor never caputres historical performance, b/c they weren't there while the fancy record was being established.

You really need to read a copy of "Fooled by Randomness", and if you really want to spar with passive indexers, a copy of "Margin of Safety".

[quote=AllREIT]

If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.[/quote]

Which is 1 manager out of how many currently working, and out of how many who were working when he got started?

Bill Miller is an outlier, and not a very typical outlier at that.

You really

[quote]
 The typical results of active mangement is underperformance. [/quote]

 
My suggestion, if you believe that, is avoid the �typical� advisor. On average, most of us can�t hit a 300 yard drive. OTOH, the PGA is filled with people who come very, very close to doing so on a regular basis.[/quote]

There is little evidence that investment management requires (or even has) as much of a skill element as golf.

Investment management is probably closer to tournament poker, there is some skill element, but that element is greatly swamped by random luck.

[quote]Not much of an advantage and certainly not enough to make definitive pronouncements about the value of active management.
Sorry, but you�re once again using funds (with all the performance hurdles they face in the form of cash flows, illogical pool investor behavior, etc.. that SMA managers don�t) to base your claims. So, your  talk of �active managers� is even less accurate when all you�re describing are mutual fund active managers.[/quote]

I never said I was talking about SMA's, just actively managed mutual funds.

Don't over generalise here. Since SMA's tend not to report public figures (and may often have skews due to timing which make standardised reporting impossible) they arent comperable to public funds and so have been subject to less research.

But there is nothing that implies that SMA as a class should have better performance than mutual funds as a class.

[quote]You must realize that you�re not presenting anything the vast majority of us aren�t familiar with in terms of  academic studies, right? [/quote]

A brief refresher can be very useful.

[quote]It�s simply that most of us (as with the vast majority of trustees of genuine pools of money) don�t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.[/quote]

Who said I precluded the use of active management in all cases? I think the use of actively managed mutual funds is dumb. Don't put idea's in my mouth.

[QUOTE]That�s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your �evidence� is riddled with truck-sized loop holes. IOW, your absolutist commentary isn�t supported well by your caveat-filled evidence.[/quote]

Now you are just making things up. First you claim that I am repeating the the results of academic studies. Then you claim that I am challenging people's ethical standards, and then you claim that the studies about the performance of actively management have loopholes and so forth.

I'll say this much. The result of any study of a group, cannot be over generalised to the individuals in that group.

You will always have outliers (extreme cases) and subjects who are above average. But if, going in blind,  you have to ask about the typical group member, then group results will be most typical.

The typical result of active management of mutual funds is that they underperform. Of those that do outperform, it is not consistant over longer time periods.

On a theoretical basis, the observed dispersion of mutual fund results is consistant (i.e not inconsistant) with an effecient market that impossible to beat.

And that's all I'm going to say about the subject.

[quote=AllREIT] [quote=mikebutler222] You and I both know that even if you ignore the 20% (and that survey�s based on MUTUAL FUND active managers, not �active managers�) that DO outperform the average (and why not, instead of accepting the average, use that 20%?)[/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

And can you pick that 20% ahead of time. All the time? Consistantly?  [/quote]

Again, you and I know that number is larger than 20% and it is ONLY talking about mutual funds and not "active managers" as a whole. Again, you’re misusing the terms of the study. Sloppy work equals sloppy results.

[quote=AllREIT] [quote=mikebutler222] Qthe survey includes managers that aren�t even attempting to outperform the average because their aim is a lower beta, or income. It�s a wildly misleading claim. �In general� is a loop-hole you could drive a semi through.[/quote]

I just posted the SPIVA site, you can go look through over there. SPIVA is corrected for that by the use of appropriate benchmarks, correcting for survivorship bias (funds that suck get merged/liquidated) etc [/quote]

Correcting for survivorship doesn’t eliminate every , for example, large cap fund from the comparison universe that isn’t attempting to beat the S&P index because it has another goal, like lower risk or higher income. BTW, just what would I trust the S&P people when they construct a study to prove their effectiveness?

[quote=AllREIT] You haven't read this quarters SPIVA report, have you?

Because again, your forgetting the part about appropriate benchmarks. Domestic funds vs domestic benchmarks and international vs international benchmarks. [/quote]

I have read it, and I’ve read the other supporting research. That’s why I’m able to correct you. What you’re saying isn’t a recent assertion, and applying a domestic benchmark, say, the S&P 500 to a large cap fund does NOT eliminate those funds that EXPRESSLY have other goals than the index itself. AGAIN, lower beta or higher current income. Including those sorts of funds that happen to own large cap stocks but with another agenda serves to skew results in the favor of the index, thus padding their marginal leads.

[quote=AllREIT] [quote=mikebutler222] Absolutists in the passive camp also never bother to attempt to tackle the fact that serious money in this country (endowments, trusts, pension plans) uniformly use active management and passive in a complimentary manner. Perhaps it�s because the they�re-crooks or they�re-foolish lines don�t ring as true when the targets are sophisticated trustees of large pools of money.[/quote]

There's a couple of flaws in your thinking.

1)     Alot of the active management at "serious money" is really allocations to alternative investments. Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work. [/quote]

That’s simply fiction, and someone who goes out of his way to cast aspersions about the ethical nature of people who disagree with them on the proper implications of statistical studies should know better. If you like I can provide you with reams of names of active managers that run conventional equity portfolios for massive pools of money like CALPERS and the endowments of ever major university in the nation, all of which have very informed trustees. Now, if you’d like to support your assertion that these trustee are rubes, by all means…...

[quote=AllREIT]

And what is serious money anyways? Just cause you have a slug of money (from whatever source) doesn't mean you know how to manage it or even know how to hire people to manage it. [/quote]

I can hear the trustees of massive defined benefit plans and charitable foundations having a pretty good chuckle at your comments on that one.

 [quote=mikebutler222][quote=AllREIT]Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest. [/quote]

As I said, you are impugning the integrity of your competition, and on very, very shaky empirical evidence. It�s amazing how often passive investment types try this �dishonest� route without bothering to detail to the client/prospect how many caveats there are in their �active managers under perform� claims. I�ve yet to see someone who uses solely active management or someone who employs both try to make the �dishonest� assertion about indexers.[QUOTE]

[quote=AllREIT] I just tell people:

1) Markets are effecient to the point where it is not profitable to try and beat them. You want the cheapest-to-deliver exposure to risk asset classes.

2) Historical results of active vs passive management show that long term, active management doesn't work.

2.5) The main area's of active management areas that work are.

a) Deep value
b) Private Equity
c) Venture Capital.
d) Some hedgefund strategies
e) Distressed investing ( which is 2nd cousin to deep value)

3) Asset allocation and risk budgeting are what you should worry about. 

4) Never ever buy an annuity.   [/quote]

[/quote]

You can tell people whatever you like, including some bits of misinformation like you’ve listed (Warren Buffet, no rube he, has some different thoughts about the efficiency  of the markets in the short-term. While it might be fair to make the counter-arguement, is it fair to call him dishonest?). However, if you jump from expressing your opinion about the above to asserting that those who disagree with you are unethical, you’ve crossed a line that says more about your standards of honesty than theirs.

Mike, I'd just as soon indexing disciples keep believing the efficient market/indexing story....it makes my job easier...

As a quick example of how easy it is to beat the index, I laid Vanguard's 500 index fund next to every domestic stock fund ran by American Funds and compared on an all-expenses basis for the last ten years.  Here are the unvarnished results:

Vanguard 500 index: 8.12%

Growth Fund of America: 12.37%

Fundamental Investors: 10.48%

Washington Mutual: 9.00%

Investment Company of America: 9.64%

AMCAP Fund: 10.73%

American Mutual Fund: 8.79%

These numbers are trailing ten years as of March 31, 2007, and all American funds have the MAXIMUM load applied as opposed to Vanguard's 0.18% expense ratio.  Add on the advisor fee and indexing looks even crappier.

I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.

The sad thing is, there are lots of better funds and managers than the ones I cited here...I just used a very common strategy to illustrate my point.  I hope Suze and others keep telling everyone to index...

You get what you pay for.  A lazy advisor is almost worse than no advisor at all.

[quote=AllREIT][quote=mikebutler222][quote=AllREIT] [quote=mikebutler222]I know the fans of passive management like to say that, and they like to base their claim on statistical studies that always involve the term "on average" (yet they love to ignore the above average outliers that are far more common than they like to concede), but it simply isn't so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don't reflect the typical results. [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.[/quote]

If lets's take that 1 year 20% in mind. In any given year the odds against you picking the lucky fund are 4:1 against.

I'd flip coins all day if you paid me 4:1.  [/quote]

If the selection methodology of picking managers was flipping a coin, you’d have a point, or if the 20% really did represent a single year.

[quote=AllREIT]

But as you increase time horizon's the %age of outperformers and the cummulative extent of outperformance get less and less. Historical data shows that investment performance tends to be mean reverting. [/quote]

“Tend to be”, “on average”. Again, you’re making definitive assertions and using language from studies that’s anything but definitive. It would matter if the selection process were purely random, but it isn’t.

[quote=AllREIT]

And ofcourse, when Bill Miller started out you couldn't have know he was any good. [/quote]

That’s a irrelevant point, as we now have some 19 (?) years of observations on which to make a selection in his favor. You could have made an informed decision 15 years ago to employ him and not the index he beats with remarkable regularity. IOW, what settle for an approach that is very likely to underperfom identifiable managers?

[quote=AllREIT]

As morningstar's investor weighted performance figures show, the typical investor never caputres historical performance, b/c they weren't there while the fancy record was being established. [/quote]

Another irrelevant point as we’re talking about advisors, and not “typical investors”.

[quote=AllREIT]

You really need to read a copy of "Fooled by Randomness", and if you really want to spar with passive indexers, a copy of "Margin of Safety". [/quote]

There’s no point. I (and most everyone in the business more than 10 years) long ago read the underlying academic studies that the popular press attempts to misuse to dismiss the power of active investing.

[quote=AllREIT] [quote=mikebutler222]
[quote=AllREIT]
If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.[/quote]

Which is 1 manager out of how many currently working, and out of how many who were working when he got started? [/quote]

Again, irrelevant. It doesn’t mater of how many, it matters that he’s done, consistently, what you claim (by misusing your sources) can’t be done.

[quote=AllREIT]

I never said I was talking about SMA's, just actively managed mutual funds. [/quote]

Actually, you’ve consistently said “active managers”. I’ve had to point out you’ve misapplied the studies, which ONLY refers to mutual fund managers.

[quote=AllREIT]

Don't over generalise here.[/quote]

That’s interesting coming from you, since that would be my number one criticism of your presentation thus far. You’ve made broad definitive statements about the value of active management by trying to use in a very specific manner things the studies say in much more generalized, caveated terms.

[quote=AllREIT]  Since SMA's tend not to report public figures …[/quote]

Untrue.

[quote=AllREIT]

But there is nothing that implies that SMA as a class should have better performance than mutual funds as a class. [/quote]

Of course there is. Two quick examples; 1) mutual fund returns are skewed substantially by inflows and outflows of cash, which are often functions of the irrational decisions of individual investors motivated by market swings. 2) Even rational decisions on the part of investors to add or subtract funds cause managers to make purchase or liquidation decisions they wouldn’t otherwise make, unless forced.

[quote=AllREIT] [quote=mikebutler222]

It’s simply that most of us (as with the vast majority of trustees of genuine pools of money) don’t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.[/quote]

Who said I precluded the use of active management in all cases? I think the use of actively managed mutual funds is dumb. Don't put idea's in my mouth. [/quote]

You’ve consistently dismissed active equity management, haven’t you?

[quote=mikebutler222] That’s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your evidence is riddled with truck-sized loop holes. IOW, your absolutist commentary isn’t supported well by your caveat-filled evidence.[/quote]

[quote=AllREIT]

Now you are just making things up. First you claim that I am repeating the the results of academic studies. [/quote]

I thought you realized what basis there is for the argument you’re making. It’s the absolutist view of MPT.  Anyone in the business over a few years is familiar with both sides of the debate.

[quote=AllREIT]

Then you claim that I am challenging people's ethical standards,…[/quote]

You aren’t? What did you mean by “Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest.”? Or “ Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work.”?

[quote=AllREIT] …. and then you claim that the studies about the performance of actively management have loopholes and so forth. [/quote]

Again, I assumed you knew that what you were repeated was the absolutist view of MPT. If you knew that, you’d know the “generally” and “often” and “typically” loopholes involved.

[quote=AllREIT] You will always have outliers (extreme cases) and subjects who are above average. But if, going in blind,  you have to ask about the typical group member, then group results will be most typical.

The typical result of active management of mutual funds is that they underperform. Of those that do outperform, it is not consistant over longer time periods. [/quote]

One last time, 25-45% isn’t “extreme” and “typical” is too ill-defined a term to make definitive statements dismissing the value of active management in equity portfolios.

[quote=AllREIT]

On a theoretical basis, the observed dispersion of mutual fund results is consistant (i.e not inconsistant) with an effecient market that impossible to beat. [/quote]

The problem with that assumption is the belief that even in the short term the market’s so efficient that skilled investors cannot profit from imbalances that make a significant difference when accumulated over the longer term.

[quote=Indyone]

Mike, I'd just as soon indexing disciples keep believing the efficient market/indexing story....it makes my job easier...

As a quick example of how easy it is to beat the index, I laid Vanguard's 500 index fund next to every domestic stock fund ran by American Funds and compared on an all-expenses basis for the last ten years.  Here are the unvarnished results:

Vanguard 500 index: 8.12%

Growth Fund of America: 12.37%

Fundamental Investors: 10.48%

Washington Mutual: 9.00%

Investment Company of America: 9.64%

AMCAP Fund: 10.73%

American Mutual Fund: 8.79%

These numbers are trailing ten years as of March 31, 2007, and all American funds have the MAXIMUM load applied as opposed to Vanguard's 0.18% expense ratio.  Add on the advisor fee and indexing looks even crappier.

I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.

The sad thing is, there are lots of better funds and managers than the ones I cited here...I just used a very common strategy to illustrate my point.  I hope Suze and others keep telling everyone to index...

You get what you pay for.  A lazy advisor is almost worse than no advisor at all.

[/quote]

[quote]I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.[quote]

I'll be reminding myself of the dangers of post hoc data mining. I.e you only look at the winners.

And survival bias is a  big problem in doing this, since the only funds that are still around for 10 years have beaten the indexes. That really says very little about if they can keep it up for the next ten years. (Classic examples, Performance of GFA or Bill Miller in 2006)

On the whole, if you put your money into 10 random funds, and then then come back in 3 years, 7+ of them will have underperformed thier benchmark. There isn't good odds.

Some of those funds will underperform by a large amount. This is expensive.

I.e no one talks about the Van Wagoner funds.

IMHO ya'll should read a copy of Nassim Taleb's Fooled by Randomness.

[quote=AllREIT]

 That really says very little about if they can keep it up for the next ten years. (Classic examples, Performance of GFA or Bill Miller in 2006) [/quote]

You say "next ten years" and then try to make an issue of 2006?

[quote=AllREIT]On the whole, if you put your money into 10 random funds, and then then come back in 3 years, 7+ of them will have underperformed thier benchmark. There isn't good odds.[/quote]

Then I suggest you not randomly select managers.

[quote=AllREIT]IMHO ya'll should read a copy of Nassim Taleb's Fooled by Randomness.

[/quote]

Life isn't so long that I can read every book ever printed, so, in order to make sure I'm not wasting my time, tell me what his 3,5 and 10 year annualized numbers are.

I'll be reminding myself of the dangers of post hoc data mining. I.e you only look at the winners.

Not really.  Indyone was quoting the majority of the American Funds equity funds that are comprised of US Stock.  He didn't use the composite and international funds they have which also have good performance

Capital World Growth and Income  13.10%

Capital Income Builder 10.73

American Balanced Fund  8.86

If the majority of their equity funds and blended funds outperform the Vanguard Indexed fund even with full load included, that tells us something about American Funds, Vanguard and the whole premise of passive index investing.

If you're focusing strictly on 2006, GFA and AMCAP underperformed.  The other four in my example beat the index yet again.  As far as looking only at the winners, I looked at every domestic stock fund American carries...not just the "winners".  As far as I know, they've not merged or liquidated any funds, but I'll leave it to someone who knows them better than I do to verify this.

As far as picking random funds...why on earth would I?  If you look at managers with long-term track records that persistently outperform the indexes, why wouldn't you use them?  As I said earlier, the funds cited in my example aren't the best ideas I have...just a very commonly used idea that most folks on this board would be familiar with.  Most of the managers I use beat their index last year...some by wide margins.  All of the managers I use beat their respective indexes over the last ten years.  Although I don't use his fund, I'd take my chances with Bill Miller rather than index...one underperforming year doesn't disqualify a manager as long as they outperform over the long term.  I have no interest in using Van Wagoner funds.

If indexing works for you, go with it.  I've looked at indexing a long time and have never been sold on the theory.

Well the way I see it there’s many ways to skin a cat.  I don’t have a problem personally with the indexing camp-I just happen to thing they’re wrong and it doesn’t work for me.  That doesn’t make them bad people, and I’m sure plenty of their clients make money.

Having said that, don’t kid yourselves…buying an index might mean that you are buying a low turnover inexpensive product, but it is NOT an “unmanaged” passive product.  The folks at S&P and EAFE/MSCI and Dow Jones PICK the companies that go into the indices, and with most indices they have substantial discretion.  The S&P 500, for example, is NOT as many people believe the 500 “biggest” or “most profitable” or “fastest growing” companies in America.  They are 500 companies that S&P believes to be “representative” or “significant”.  (Note-these are my words, and my understanding.  If one of you index-philes wants to pull the official definition off the S&P website to show me up, have at it.)  I also am personally uncomfortable with how market cap weighting works in most indices to have you far less diversified than most people think.

Too, in my unscientific but somewhat experienced opinion, I think that index funds and ETF’s that follow them are “bull market” vehicles unless you use a stop loss or a hedging strategy.  Go back and pull up an actual chart of the S&P 500, R2K, or Nasdaq 100 indices from say October 99-March 2005 if you have any questions about that.

As far as I’m concerned it’s really NOT about beating indexes. It’s about performance, but only to the extent that 1.)  It delivers the capital over time that clients need to meet their financial goals, and 2.)  those returns come in a fashion(without too much variability) that the client stays “in the game” and doesn’t pull the eject lever when things are bad, or pile into the hot sector when things are good.

[quote=joedabrkr]Well the way I see it there's many ways to skin a cat.  I don't have a problem personally with the indexing camp-I just happen to thing they're wrong and it doesn't work for me.  That doesn't make them bad people, and I'm sure plenty of their clients make money.[/quote]

I have no problem with them either, until they insinuate that those who disagree with them simply aren't honest.

[quote=mikebutler222]

[quote=joedabrkr]Well the way I see it there’s many ways to skin a cat.  I don’t have a problem personally with the indexing camp-I just happen to thing they’re wrong and it doesn’t work for me.  That doesn’t make them bad people, and I’m sure plenty of their clients make money.[/quote]

I have no problem with them either, until they insinuate that those who disagree with them simply aren't honest.

Just a reminder this is a Reputation forum not a index vs active forum!

[quote=babbling looney]

3. There is no understanding of the level of education and on going training that is required to be able to be a "good" financial advisor.  We are charging not just for the current activity of buying an investment but also for the years of time spend in obtaining the knowledge that we need to be able to advise.  Just like a doctor or lawyer who is recoveing the cost of their years of education.  Clients are surprised when I discuss the ongoing training that is required by the various licenses that I hold.  The time commitment and costs are never made apparent to the public.

[/quote]

I agree with everything you said except for this statement.  Unlike doctors and lawyers there is no long and expensive educational hurdle.  In fact, there is no college requirement at all, merely the ability to self study and pass a few exams.  The "years of time spend in obtaining the knowledge that we need to be able to advise" are part of the problem.  We don't get this knowlege through education or apprenticeship.  We get it by pretending to be FAs when we really have no idea what we are doing (and have minimal supervision).  There's still no guarantee that someone who has survived the first few years has learned anything, other than how to sell.  It's hard for a profession to have respect when you could go from selling books door to door one day (or substitute any other job) and three months later be called a "Financial Advisor".   With the proliferation of FAs, most everyone has a friend or relative that has gotten into the profession with no financial background. 

Our profession is much more like realtors than doctors & lawyers.  The low entrance requirements and high earnings of the very successful in real estate cause a lot of people to "try it out" and then go on to something else.  I have several relatives in real estate and the similarities are many.