Active vs. Passive

[Bob H]

From Investment News... Will be interesting to see if Bogle (or anyone) takes the challenge.



John Bogle, founder of The Vanguard Group Inc., is being challenged to put his money where his mouth is with regard to index-based investing. The gauntlet was thrown down by active money manager Roger Schreiner, chief executive of Schreiner Capital Management Inc., who wants to take on the longtime critic of market-timing strategies in a money management competition.


“Mr. Bogle is sincere and has noble ambitions, but I believe his unwavering faith in the markets is misplaced,” said Mr. Schreiner.

According to the terms of the bet Mr. Schreiner is proposing, he would put up $100,000 against a matching amount from Mr. Bogle. The bet is that Mr. Schreiner can outperform through active management any portfolio Mr. Bogle is willing to hold passively. The time period can be set by Mr. Bogle, as long as it is at least one year. During the contest period, no management fees would be charged against Mr. Bogle's portfolio, but Mr. Schreiner would deduct a 2% annual management fee, in addition to all transaction costs.


The winning portfolio must have both higher return and lower risk, based on total return and standard-deviation calculations. The winner of the challenge could keep his money, but the loser would have to donate $100,000 to the winner's favorite charity. While Mr. Bogle is not jumping at the challenge — he could not be reached for comment for this article, nor has he responded to Mr. Schreiner's request — the latter has set aside $1 million to take on up to 10 other passive investors in separate $100,000 wagers.


“Whenever I hear somebody bash market timing, I send them a copy of the Bogle challenge,” he said. “So far I've done that about 20 times, and I've never gotten a response yet.”

[Bradly T.]

Received a reprint copy of Barron's Top Mutual Fund Families For Decade ending 12/31/2008 - several factors including cost were weighted - 14 fund families scored higher than the cheapest one, Vanguard. I've read before that although only one third of active managers beat the index, over two thirds of the money IN active funds are IN the one third that do beat, regularly and significantly, their index competitors. Seldom is the cheapest of anything the best. My money stays on the active side.

[wiseguy]

Market timing absolutely works. I saw the bottom of the market slide in March and recommended Ford to one client. Five months later it was up 400%.

[Bob H]

Market timing absolutely works. I saw the bottom of the market slide in March and recommended Ford to one client. Five months later it was up 400%.

That's super!

Me? I shorted the same exact stock at the TOP. Then re-bought at the bottom. I made 800% !


What was the line my uncle used to say? Oh yea... First liar doesn't stand a chance.

[Bradly T.]

I'm sure Bob is joking (and making a good point)!! I do NOT time markets or make picks....I DO employ active managers who use both fundamental and technical research to select securities and rotate sectors and charge for their time, resources, and disciplines for both. But their approach is more tactical than speculative. I am not qualified to provide this service to individual investors. Kudos to those who are skilled enough and have the resources....I've never met any though. The wager is between two fund managers.....not two advisors. I love humor though when I'm not sure what I'm laughing about. Anymore great pickem and timem stories out there?

[Bob H]

Anymore great pickem and timem stories out there?

How about S&P research telling readers (I'm not making this up..) On the Friday BEFORE Freddie and Fannie were taken over by the Gov't that they heard about the upcoming re-org and thought this would be good for shareholders. And if you owned the Pref's not to worry.

Monday? Stock went from $25 to $0.50. Nice!

S&P never saw it coming. Bernanke and Geitner freely admit THEY never saw it coming. And I'm going to know this? Right.




I put ZERO weight on market timing.

[JCJ3rd]

Bob H --- Loved your comment. About fell off my chair laughing. Been in the business for more years than I would like to admit and have yet to come accross anyone that could "time the market" on a consistant basis. Seen a lot of lucky calls, but never anything consistant. Never - and that takes in quite a few market cycles.

[wiseguy]

I know the author of eight financial books who says once you are an author it seems like everyone you know is an author. The same principle is true for me; I know several accurate market timers. Most people just don't have access to guys that personally make the GDP of a small country or have their name on buildings at Notre Dame.

[JCJ3rd]

Wow !!! I am humbled to be in your presence.

[Bob H]

I know the author of eight financial books who says once you are an author it seems like everyone you know is an author. The same principle is true for me; I know several accurate market timers. Most people just don't have access to guys that personally make the GDP of a small country or have their name on buildings at Notre Dame.

Wise:

I am the first to say I do not know everything. I always thought market timing did NOT work. You say otherwise. Please share with us (so we may learn) the names of the "several accurate market timers." Obvoiusly, all out clients would benefit from the same success. Also, please provide links to audited financial results. As Prez Reagan said.. "Trust, but verify."

I, and others here, look forward to learning from you and your sources.



Lastly, as we all know, what they earn... "that personally make the GDP" yada yada yada means nothing. Bernie Madoff made tons of cash to. Let's stick to meaningful data. Their audited perfomance numbers.

[wiseguy]

Bob,
Thank you for your civility as it encourages discussion.

My mentor taught me Elliott Wave in combination with Fibonacci. The common complaint about Elliott is people get lost in the middle of the wave but I've never found anything that works better.

The market timers I know are very private and guard their identity. My mentor would never handle anyone else's money and has nothing to sell so wouldn't be interested in an audit, but I can tell you his personal income from his own trading is what you'd expect form someone who owns seats at the Mercantile Exchange. We've all used Elliott successfully for over a decade each.

So my point is simply what I said at the beginning: I know market timing works because I do it and know others that do as well.

Good luck.

[Bob H]

I am well aware of the success and failures of that theory.

Recall that R. Prechter (the new Mr. Elliot Wave) wrote a book in 2002 predicting the Dow will drop below 1000. A quick look at the Dow since then shows the results.



Again.. One can post general statements all they want "They are real successful" ; "They own all sorts of stuff" but to me, its verifiable results. And you still have not provided any.


Nothing personal, but until I see audited numbers, the statements have little impact. Remember.... Madoff owned all sorts of stuff and it was all smoke and mirrors. Beware of false Messiahs.

[Bradly T.]

Which leads to a practical point; how could a retail advisor with hundreds of accounts allocated specifically for a family's unique wealth, risk, tax, and income situation possibly apply the mechanics for swift executions required by a picking and timing style?????? An individual managing their own money or a fund manager executing a specific style within a specific market or sector CAN research and execute efficiently. An advisor does now have resources for mass transactions too - but every individual portfolio would need to be a clone of all others and since money flows in and out of each client portfolio at different times, returns would not be consistent for each investor even upon the identical execution.


It does not matter if it works or not (and I agree I've never seen, heard, or read any evidence that anybody or any discipline or any theory has ever produced consistant results through multiple market cycles in my 22 years looking), how would any of us execute such a thing??????????? And what is the liability exposure if you fail???? And most (all?) do!!



It is a great way to sell books or academic theories but it's a crazy way for portfolio advisors to believe or behave.

[wiseguy]

Bob, I can see why this is frustrating. The people I'm referring to don't share their info and probably hope you don't start using Elliott. I can only say I've known them for years and find their claims credible, but I presume that's not very satisfying for you.

Brad, I'm not sure I see how your point is different than what you do now. Why would any advisor leave clients in the market if you knew we were headed for a 4th wave? Isn't re-balancing their portfolio the only responsible service? Isn't that unwieldy and potentially untimely to initiate now? And the bottom of the A-wave was obvious so it called for a completely new strategy, so every client needed a new evaluation.

But as you stated, you've not seen any forecasting tool regularly applied with accuracy, so huge modifications in strategy would be the irresponsible action.

I guess that's why their are so many tools, and if we all had the same opinion there wouldn't be a market. This has been eye-opening. Thanks to everyone who participated in the conversation.

[Bradly T.]

wiseguy - yes I rebalance client portfolios. VA owners receive mechanical auto rebalancing based on my frequency selection. My fund owners distribute dividends and gains to cash for semi or annual rebalancing ( also apply new $$ contributions for rebalancing). I do NOT unbalance my allocations though (flight to cash, move back to equities) based on market volatility or technical forcasts. I HAVE added other diversification categories to both fixed income and equity allocations in response to new markets and alternatives available but not in response to the swan event.


My client portfolios have done fine through the "event" and "recovery" thank you, precisely because they were not over allocated to equities to begin with and we rebalanced into equities, per their allocation targets, during the swoon so clients own shares that are still down and others that are up 60%+ and others at par, etc., etc. I am not paid to beat markets or predict them, I am paid to participate in markets according to an appropriate allocation, sufficient diversification, and keeping those targets in balance based on market results. The biggest problem with timing is the number and frequency of new market "affect" and "response" factors that morph into being - someone is always creating new ways to overcome or take advantage of previous outcomes and current conditions. It's like a germ or virus or other biologic unit....they respond to new conditions and stimuli or evolve to cope and thrive in new environments. That's why what may have worked before does not mean it works now or in the future.



So, predict what you want by whatever method you wish....I am not tempted by the poisened fruit.

[Coz]

Which ones on the Forbes list are market timers? Successful long term market timers must have accumulated quite a bit of money over time. Buffet is on the list, but he's a buy and hold guy.-

[JCJ3rd]

Which ones on the Forbes list are market timers? Successful long term market timers must have accumulated quite a bit of money over time. Buffet is on the list, but he's a buy and hold guy.-

Excellent point !

[Bradly T.]

There's a huge difference between an active fund manager and a market timer!!! Active management is a selection, value purchase and strike pricing, sector rotating process using some combination of security fundamentals and technical tracking to determine what to buy, hold, and/or sell in a portfolio usually focused in a specific market segment, usually seeking long term capital appreciation through a specific style and discipline.


Market timers are in and out, in and out looking for short term profits from significant security price moves (or index moves). While both do share some methods and strategies, they are not the same animal. However, there are more and more funds whose stated style IS using options, deriviatives, etc. for predictive timing (not owning anything, just betting on movement and momentum) rather than pure hedging. These products always arrive after-the-event to attract money from recent victims and rookies promising to protect them (us) from a past event. They usually disappoint.....eventually.



Mr. Buffet has always held that the markets could close down for all he cared, or open once a quarter or so. He does not invest in markets, he buys good companies in promising industries that know how to make money. No doubt he has a buy and sell discipline based on fundamental research and intimate knowledge of both micro and macro economics. He understands that while markets rise and fall based on economic outcomes, well positioned and well managed companies survive and thrive based on additional factors - thus the point of active management - own everything (index)? - or actively select perceived superior companies? The difference from active and timing is timers don't care if their picks are superior, their criteria is....is it moving? and the quicker the better!!

[Coz]

What are the best independent studies that compare active vs. passive investing?

[Bob H]

Coz:

Sorry I can't specifically site any. But all the ones I've seen have led me to the conclusion that neither one is always better. The most recent said something to the effect that in up markets the active do better. In down markets passive leads.

So it ends up you have to be a market timer to take advantage of both.

I use a mix of both. Works for me. Works for the clients.

[Bradly T.]

Coz - This and several other trade magazines have run many articles on topic but "independence" is always an issue. Try a topic and archive search at web sites. You can also run your own "study" by researching Morningstar's quarterly - compare 3, 5, 10, and longer returns of active families/funds to Vanguard funds in same style box (the index fund standard - low cost and close index tracking). You will notice which funds (and the size of those funds) have beat the index, net of additional management fees, and they are not hard to find. Also watch the beta comparison (index is 1.0) - an active manager that delivers 90% of index with beta of .8 still beats the index relatively.


The problem is comparing indexers to style purists vs. style drifters vs. open prospectus managers vs. blended. It's really not an easy comparison. Most studies show that less than half (maybe even only one third) of active managers beat their closest index. American Funds argues that active does provide SOME downside alpha - but you wouldn't feel very good about that in 2008!! There are very experienced advisors who are purists in both directions and many who use index for core and active for alternative. With all the new ETFs and indexes available, some are doing the opposite even, active for core and exotic ETFs for alternatives and tactical.



If you use active, in general, stay away from new and small. Identify experience, style, discipline applied over several market cycles. If you're looking for a single family solution for full spectrum allocation, your choices get much smaller as only a dozen or so families are big enough and very few of them are exceptional across the spectrum. This is not a case where best practice is clear cut.

[Coz]

It seems to me that a best practice should be clear cut -- at least by market segments.


I'll make my request more specific. Let's just look at US large cap blend funds. The Vanguard S & P 500 Index Fund has been around since 1976 and there have been many actively managed funds available over the past 33 years with audited numbers to use for comparison. How many of these actively managed US large cap blend funds have outperformed the Vanguard S & P 500 Fund? How many funds have been in business during this period? This should help to determine how likely it has been to choose a successful active manager for this market segment.



Simply using Morningstar data is not sufficient. 3,5, and 10 years are periods that are too short. Also, this would lead to survivorship bias.

[fundinvestguru]

We need some basic definitions here before we continue the discussion and we need to ask some serious questions.

Definitions:

Market Timing, many seem to believe, is a strategy attempting to pick market highs and lows and invest accordingly.

Buy-and-Hold is to sell a portfolio of "actively-managed" or index funds, most of which refuse to or are forbidden by their prospectuses to take defensive action in a down market (sell short, go up to 100% to cash, hedge against downside risks.

"Actively-Managed" Funds attempt to by investing in individual securities to outperform their benchmark indexes. These same funds commonly turn over their portfolio 100% each year striving to avoid style-box re-characterization.

Proactively-Managed Portfolios are those who attempt to achieve their clients’ objectives. For example, a growth portfolio can seek to grow clients’ assets rather than invest in growth stocks as described by their style box. Their strategies include one thing that asset allocation and buy-and-hold investors

Portfolio performance, risk and other statistics are available conveniently on Morningstar Principia Mutual Funds which are nearly always tied to a specific style box, Principia Separate Accounts can include many types of portfolios but is where you will find a representation of market timers with sufficient data to compare performance (Morningstar's preference for buy-and-hold makes it difficult to dig out the criteria you might wish to use to make one-on-one comparisons.)

A real discussion of Active vs. Passive asset management has to include a discussion of publicly-disclosed performance statistics which can be compared one to another Since separate accounts data is forced by Morningstar to be reported gross of management fees, investment advisors are required to disclose to investors net returns after average management fee and mutual fund returns are disclosed net of management fees but gross of loads, comparisons are difficult.

The easiest and most consistent way to do comparison is to sort for those portfolios with HIGH Morningstar returns and LOW Morningstar risk ratings and, of course, overall Morningstar ratings. I would suggest that you compare the well-researched and regulated Morningstar mutual fund and separate account data bases

If you or your firm is unwilling to get you access to the Separate Account data base, ask your local public library to do so. If you don't get familiar with that data base, you should not be making wild comparisons between market timers and passive buy-and-holders.

For a comparison, if you use an initial search for High 5-year Return, Low 5-star Risk and five-star mutual funds for 5-years you will identify only 65 funds of any kind averaging 5.44%. If you apply the same criteria to Separate Accounts and you will find 38 more portfolios averaging 21.88%. I'm not reaching any conclusions here but only suggesting a data base for further study.

I would welcome a discussion of the results of these searches IF we can agree that the information to be disclosed in not a lie or a fabrication but simply data from a respected data base with which you may be unfamiliar. I will also disclose that on a risk-adjusted basis some of my separate accounts may be viewed favourably. As you know, this is not the place to" promote" or discuss our performance. I can be reached directly at [url=mailto:fessormojo@yahoo.com]fessormojo@yahoo.com[/url] if that is permitted to discuss market timing vs. proactively-managed separate accounts.

This is an important issue which will determine the future of our society. If millions cannot afford to retire, can they achieve the American Dream of retirement with dignity?

My best Holiday Wishes To You All

[Bradly T.]

Mr. Donahue - As this thread is about the difference between active fund management vs. index funds and not about retail advisory portfolio allocation using either or both styles, you, as an active fund manager, have a point of view to be heard here. And I would like to ask your opinion about what retail advisors are to do based on your low opinion of MPT asset allocation. Please remember that we are discussing an entire industry with nearly 1mm advisors with tens of millions of investor clients and hundreds of millions of accounts: describe the portfolio style and discipline you actually promote in a way that can be presented by us to them. Not your fund's style and discipline - the investor's portfolio management and Investment Policy Statement.


Now I can explain using either passive or active styles and even tactical allocations vs. passive rebalancing or a fund vs. a SMA manager. But how do I explain what you do?? How do I explain picking 2-5 managers who do anything with money anytime to achieve a nonabsolute or nonrelative performance but will place huge bets on market directions and cycles both defensively and opportunistically on their behalf?? Do you see the dilemma? How do we describe it? Is a simple track record sufficient? What role then do we play - since any historical record clearly dileanates those who do what you do most successfully? And who then would actually "invest" in companies and economies to share in their success? And what would happen to market liquidity if everything were deriviative based or "held" short?? And what of the masses of less affluent who cannot meet SMA minimums (why even your own fund charges exhorbitant fees for small accounts, it's a $100k minimum per registration isn't it?)



So, while I believe you to be what you say you are, an active portfolio manager with a "pool" of advisor/investor money to manage a specific way, I don't understand your active discussion with advisor clients about how portfolios should be invested and managers selected on their behalf. We are 50 years down the MPT presentation trail...what replaces that?

[Rocket, CFP(R)]

Passive vs. Active Management



"The Arithmetic of Active Management

William F. Sharpe,

," Financial Analysts Journal, January/February 1991, pp. 7-9. "If 'active' and 'passive' management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period." This brief, lucidly written article is perhaps the simplest and most persuasive theoretical case ever made for passive management. Anna Bernasek, "The Man Your Fund Manager Hates," Fortune, December 1999.
An interview with Burton Malkiel, author of A Random Walk Down Wall Street:
The Best Investment Advice for the New Century.
John C. Bogle, "Equity Fund Selection: The Needle or the Haystack?" a speech presented before the Philadelphia Chapter of the American Association of Individual Investors, November 23 1999.
John C. Bogle, "Three Challenges of Investing: Active Management, Market Efficiency, and Selecting Managers," a speech given in Boston on October 21 2001.
Eric Brandhorst, "Problems with Manager Universe Data," State Street Global Advisors, November 22 2002. "Even the two asset classes (international equity and U.S. small cap) that are often held up as examples of arenas where active managers can consistently add value lose their active management luster when appropriate adjustments are made to the median manager data." Anthony W. Brown, "Why Indexing Makes Sense," Hammond Associates, June 1999. Warren E. Buffet, "How to Minimize Investment Returns," Berkshire Hathaway 2005 Annual Report, 2005.
[i]"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)


"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)

"It must be apparent to intelligent investors--if anyone possessed the ability to do so (market time) he would become a billionaire--quickly--." (David Babson, author, adviser)

"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets." (Baer & Ginsler, The Great Mutual Fund Trap)

"If we haven't said it enough, we'll say it again: Market timing is dangerous." (Barron's Guide to Making Investment Decisions.)

"Only liars manage to always be "out" during bad times and "in' during good times. (Bernard Baruch, famed investor)

"Market timing recommendations have an impressive track record of being harmful to an investor's financial health." (Peter Bernstein, author, researcher)

"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know." (Wm Bernstein, author and adviser)

The Boglehead (forecasting) Contest began in 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market. In January 2008, only 2 Bogleheads guessed how low the S&P would go last year. Of 11 professional forecasters, everyone thought the S&P would gain (it declined -38%)

"If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor." (Jack Brennan, Straight Talk on Investing)

"For the 12 years ending 1997, while the S&P rose 734% on a total return basis, the average return for 186 tactical asset-allocation mutual funds was a mere 384%. (Buckingham Financial Services)

"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two." (Warren Buffet)

"Market timing is an ineffective strategy for mutual fund investors." (CDA/Wiesenberger)

"Any investment method that relies on predicting the future is doomed to fail." (Chandan & Sengupta, financial authors)

"A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it." (Andrew Clarke, financial author)

"Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation." (2003 Dalber Study)

"Take my word on it. Buy-and-hold is still your best long-run strategy." (Jonathan Clements, author & journalist)

"The buy and hold equity investor (S&P 500) would have earned a return of 8.35% for the 20 years ending 12/08, while the market-timer would have earned just 1.87%." (Dalbar research)

"Market-timing is bunk." Pat Dorsey, M* Director of Fund Analysis

"The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%." (David Dreman, author)

"Market timing is a wicked idea. Don't try it-ever." (Charles Ellis author of The Loser's Game)

"Do nothing. I think all of this market timing is statistically unfounded. I don't trust it. You may avoid a downturn, but you may also miss the rise. Choose the risk tolerance you're OK with and hold tight." (Professor Eugene Fama)

"Forget market timing in any form." (Paul Farrell, (CBS Marketwatch.com)

"The best practice for investors is to design a long-term globally diversified asset allocation based on present and future financial needs. Then follow that plan religiously, through all markets good and bad." (Rick Ferri, author and adviser)

"Benjamin Graham spent much of his career trying to devise a good formula for when to get into--and out of--the stock market. All formulas, he concluded, failed." (Forbes, 12-27-99)

"Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control--costs." (Fortune Investor's Guide 2003)

"Don’t' sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term." (Norman Fosback, author, researcher)

"The only function of economic forecasting is to make astrology look respectful." (John Kenneth Galbraith, Economist)

"I've learned that market timing can ruin you." (Elaine Garzarelli)

"Staying on course may be just as difficult in bull markets as in bear markets." (Good & Hermansen, Index Your Way to Investment Success)

"For most investors the odds favor a buy-and-hold strategy." (Carol Gould, author & financial columnist)

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting that's going to happen to the stock market." (Benjamin Graham)

"From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business." (Graham/Campbell Study)

"Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapon." (Graham & Zweig, The Intelligent Investor)

"The best advice: buy and hold." (John Haslem, author and researcher)

"Even in a bear market, market-timing and actively managed mutual funds generally hurt investment performance more than they help it." (Mark Hulbert, N.Y.Times columnist)

"After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold."

"Timing the market is for losers. Time IN the market will get you to the winner's circle, and you'll sleep better at night." (Michael Leboeuf, author)

"No one is smart enough to time the market's ups and downs." (Arthur Levitt, former SEC chairman)

"It never was my thinking that made the big money for me. It always was my sitting." (Jesse Livermore, author & famed investor)

"Nobody can predict interest rates, the future direction of the economy or the stock market." (Peter Lynch)

"Buying-and-holding a broad-based market index fund is still the only game in town." (Burton Malkiel, Random Walk Down Wall Street)

"At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to "Sell." (Miami Herald, 1-26-03)

"If you can't handle the short term, if the uncertainty is stressful and the headlines are unbearable, then the markets are too hot for you: get out of the kitchen." (Moshe Milevsky, author & researcher)

"We're not keen on market-timing. It just doesn't work." (Morningstar Course 106)

"We've yet to find anyone who can accurately and consistently predict the market's short-term moves." (Motley Fools)

"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."

"Forget trying to time the market and do something productive instead." (Gerald Perritt, financial author)

"The market timer's Hall of Fame is an empty room." (Jane Bryant Quinn)

"Countless studies have proved that no one is able to time the market effectively." (Mary Roland, author & journalist)

"Trading is based on the rather arrogant belief that the trader knows more than the buyers and sellers with whom he is trading." (Ron Ross, The Unbeatable Market)

"In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested." (Louis Rukeyser, TV host)

"For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark." (Jim Schmidt, editor)

"What do I really think is going to happen? -- I have absolutely no idea. (John Schoen, senior producer for msnbc.com)

"I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies." (Larry Schultheis, author and advisor)

"I'm a strong advocate of buying and holding." (Charles Schwab)

"It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice." (Fred Schwed Jr., 'Where are the Customers' Yachts?)

"If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor. (Chandan Sengupta, financial author)

"Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator." (W. Scott Simon, financial author)

"Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios." (Stein & DeMuth, (authors & advisor)

"Humans can't consistently pick the right stocks or call markets." (Ben Stein, economist author)

"It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom." (James Stewart, Smart Money columnist)

"It's a staple of personal finance advice: Buy-and-hold, because trading the stock market is a sucker's bet." Larry Swedroe, author and adviser.

"People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market." (David Swensen, Yale Investments)

"Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else." (Tweddell & Pierce, financial authors)

"Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work." (Eric Tyson, author, Mutual Funds for Dummies."

"Few if any investors manage to be consistently successful in timing markets." (Wall Street Journal Lifetime Guide to Money)

"If you're considering doing your own market timing, the best advice is this: Don't." (John Waggoner, USA Today financial columnist)

"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author)

[fundinvestguru]

"Methinks you protest too much!" is the simplest response to the previous post.

What was right in the bull market of the 1990s is wrong in the bear markets of the 2000s, no matter how large the commission you received.

I see the mutual fund industry (to simplify this discussion differently). I've been involved as an independent mutual fund expert since 1964, first as an auditor in 1963, as a money fund pioneer in 1973, as the "money market guru" in the 1980s and publisher of Donoghue's Mutual Fund Almanac starting in 1980 (two years before Morningstar existed) and as a registered investment advisor since 1986.

When money fund yields were peaking in 1982 and the bull market was about to take off, no-load mutual funds with telephone switch privileges were the most popular mutual funds (and the subject of many consumer newsletters). As stock and bond fund investors needed advice on how to get the most out of these wonderful investments it was the newsletters and not the mutual funds whose advertising budget was the largest. I personally mailed up to 5 million 16-page brochures on my newsletter in a single year during that period. We built the newsletter to 43,000 subscribers.

It was not really market timing because we were always diversified among several funds but it did alert investors to new investment sectors. The fact that during the 1980s international stock funds were fuelled by a US Dollar which halved as US interest rates fell is a good example. Increasing your allocation to international funds help investors build up their retirement portfolios after the disaster of the 1970s. Was that advice market timing?

By the 1990s, emerging markets came and went twice and then rose steadily. In the late 1990s, high-tech and dot-com funds lead the way. Of course, we all remember that Vanguard 500 Index outperformed all "actively-managed" stock funds for the entire decade.

By the end of 1999, the financial planning industry was wise in observing that simply investing in low-cost large-cap stock index funds was easy, that you should buy on corrections and that the public wanted to buy such a plan but thought rightfully that there was more to it and a more sophisticated asset allocation strategy was worth paying for and that load funds which compensated advisors were worth buying because financial advisors were perceived to be investment advisors.

In the late 1990s and 2000s the cult of passive buy-and-hold investing caught on and load mutual fund families paid advisors handsomely to sell that concept. Financial planners, especially the youngest, were taught the principles of investing, risk and reward was tied to style-box investing, style-box funds kept in their boxes at the very real risk of losing advisor-referred assets if they changed style-boxes and Morningstar classification ruled the world. With a strong sales pitch and a service that the investor wanted to buy (as opposed to what they needed to buy) advisors sold load fund plan, pocketed the commissions and never looked back. The evidence is that $trillions of wealth was destroyed in the glacial flow of two bear markets.

Ask a well-trained financial advisor (particularly one which was not around in the 1970s) what the average stock fund earned over the past decade and they will say, "It probably averaged about ten percent." Go to FINRA's income calculator and the default percentage is 6%.

Over the last decade the S&P 500 lost 8% in total. The decade when about-to-retire investors needed to double their money (it takes about 7.2% a year to do that), they lost money. Many will never have enough to retire and the next generation will lose much of their career waiting for that generation that cannot afford to retire to step aside for them to be promoted at a time when there are few jobs for anyone. The next generation which was waiting for a huge inheritance windfall will never see that windfall.

Passive buy-and-hold failed a generation of investors while it enriched a generation of advisors. I acknowledge that many advisors are well-meaning professionals with little choice but to go with the flow and accept the steak dinner, trips to warm climes in the winter and commissions.

That time is past. A recent study by Personal Wealth showed that 90.3% of high net worth investors were looking for another advisor and 70% are taking their money away from brand-name (one story fits all) advisors. The fact that the leading stockbrokers and financial advisors are selling out to banks and insurance companies with little qualifications in the new world offers great opportunity for open-minded advisors to acquire trillions of money in motion.

Maybe buy-and-hold advisors should look for more defensive, more proactive managers with long-term track records that have earned their respect.

For example, buying a US Treasury bond or note (or fund investing in them) sounds (on the surface) to traditional advisors as a defensive move. At the current low interest rates, nothing could be more certainly risky. Is going to cash market timing in a long-term investment strategy? I say no. I say portfolio preservation has never been more risky.

Consider the past decade. If you invested $100,000 in a money fund a decade ago, you would have about $130,000. If you chose the S&P 500, you would have $88,500 left and if you invested in one of the leading "defensively-timed portfolios"(which I cannot disclose here) you might have more than doubled your money.

Equally importantly is what are you going to do it the next decade is another "Lost Decade" complicated by rising interest rates? Buy and Hold investments which did well in the last decade may not succeed in the next.

Let's forget about passive vs. active investing and let's discuss what might work if long-term interest rates rise five percentage points over the next decade. With loan demand high and loan supply low do you think interest rates are likely to rise in the coming years? I do

[PCR]

I'm firmly entrenched on the active side, and I love the topic of the 'lost decade'. As I have posted over the years, I've been a huge fan of American Funds and Capital Group since the late 80's. I have watched them in action with client assets in good and bad times, and my clients and I could not be more pleased with the results. Here a few examples why:


For the 10 years ended 11/30/09:



S&P 500 with no fees of any sort: -0.63% per year

MSCI EAFE Index with zero fees: 2.31% per year



Some American Funds that are found in my retired client's portfolios, @ 500k breakpoint, for the same 10 years

Capital World Growth and Income 'A': 7.77%

Capital Income Builder 7.19%

High Income Trust 5.74%

Income Fund of America 5.75%

American Balanced Fund 5.50%

EuroPacific Growth 4.62%

New World Fund 9.07%

Fundamental Investors 3.74%



Here are some other random tidbits that I find interesting:

• Capital World Growth and Income Fund was born on 3/26/1993, and it is in nearly every retired client's portfolio. From inception to 11/30/2009, it has an annualized return net of expenses and the 500k breakpoint on class 'A' of 11.51%. In that same time, the MSCI World Index (with no fee of any kind) averaged 6.85%.
• Earlier in this thread, someone talked about the S&P 500 Index Fund vs. Large Cap Funds going back to 1976. American Funds has three large cap funds that go back much further than that. For the 50-year period ended 11/30/2009, $10,000 in: The S&P 500 (minus ZERO fees) grew to $917,890, American Mutual Fund 'A' at full load grew to $1,488,842, Washington Mutual Investors grew to $1,627,994, and Investment Company of America grew to $1,723,760. Some will say "Totally irrelevant...those funds are not the same as the S&P 500".....to which I say "You can't see the forest for the trees."
• I'm not interested in style boxes, sharpe ratios, or monte carlo simulations. I'm interested in knowing that my client's assets are being managed daily by a research-driven, low-cost, level-headed ACTIVE manager that tends to buy stocks and bonds at good prices without a lot of turnover for the long-term.
• Did y'all see the article in the WSJ last week identifying CGM Focus Fund as having the best 10-year record of any stock fund at over 18% per year? Did you read on to see that Morningstar calculated (using time-weighted asset analysis) that the average investor who owned CGM Focus lost 11% per year in the fund?
• I met with a client last month who rolled over $700k to an IRA with me in June of 1989 when he was 64. He bought only two funds, and he only owns those same two funds in that IRA as I type this: Capital Income Builder and the Income Fund of America. He has drawn over $1.3 million of income since '89, and his IRA is worth $1.6 million. He has averaged just over 10% per year total return with pretty low beta. So excruciatingly simple, as long as you let the ACTIVE managers do their jobs. I've discussed reallocation ideas with him, but I think he'd behead me before he sold any of his shares of these funds. Pancreatic cancer is about to claim this wonderful client of mine, but I must say that other than my marriage and the birth of my kid, the review meeting I had with this man last month...yes, the last one we'll ever have...was the most meaningful, emotional, bittersweet event in my life. He knows his wife will be just fine, and his words of thanks to me had me doing a fine impression of a faucet.
• Speaking of the client I just mentioned above, the compensation I get each year is the .25% 12(b)-1, which is included in the roughly .60% annual cost of owning these funds for the past two decades. I'd love to hear Mary Schapiro explain to me why 12(b)-1 isn't a superb value in this case, and in the cases of countless other client histories in my book of business (and in the books of many of your businesses, too).

Happy New Year, everyone
PCR

[Bob H]

Todays WSJ has an article on this.

It's a long yet pretty good article. The bottom line doesn't change my approach at all.






"Actively managed stock funds did a better job relative to index funds in last year's stock-market rally than they did in the previous year's market rout.

Looking at performance a different way, the Chicago-based research firm says that in 2008, 43% of those active funds did better than the Russell index associated with the size and style of the stocks each fund usually buys.

In 2009's market rebound, by contrast, the average actively managed U.S.-stock fund more convincingly beat the average passive fund, with gains of 32.8% vs. 31.7%,


"If you held an active fund that meaningfully underperformed in 2008, it may [have led] you to be concerned about active management in general," he says. And given that 2009 was a better year for active funds, the same investors might now look askance at index products. Ultimately, though, leadership tends to switch cyclically between the two, he says."



There you go.... They both work. Which ever side you believe works best... Your right!