Vanguard Index Funds (bonds, fees, investment, loan)

[mathjak107]

the problem with index funds is they do well in up markets but poor in down markets. historically markets were up 2/3 of the time and down 1/3 of the times.

this decade wasnt like that and index funds werent so good compared to managed funds.

remember index funds are forced to hold the issues in that index until they are actually voted out.

while managed funds were fee to drop the likes of gm and citi bank early on the indexes were forced to sit with them.


apple and yahoo make up 1/3 of the nasdaq 100 index ..if anyone of them takes a hit your screwed with an index fund even if the other issues are fine.

im not saying managed is better than indexing ,im just saying there are pitfalls to both and the fact that index funds did well in the days past doesnt mean going forward they will .

[CouponJack]

Originally Posted by mathjak107

the problem with index funds is they do well in up markets but poor in down markets. .

That is untrue.

Its very simple. Index funds are not "average". Over the long term they outperform a majority of managed funds in their benchmarks mainly because of costs.

I cannot pick the managed funds that will outperform over the next 20 years (and neither can anyone else.) I will not try to hit a "homerun", but I'll go for the guaranteed double or triple.

[mathjak107]

it is very true. while we dont know which funds will do well in the future or what markets will do what i said about index funds doing poorly in down markets is very true. index funds need good up markets to outperform . the same general statement that 80% of managed funds cant beat the indexs long term can hold true in the reverse if markets trend sideways to down. then 80% of managed funds may beat the indexes as the the last decade turned out..


over the last 5 years there are 16 large cap fidelity stock funds,all but 3 beat the s&p 500 and thats with expenses.. we can say 80% of those managed large cap funds beat their index over that time frame..


the last decade was pretty much sideways to down.overall it looks like in the large cap group the index funds were not the overall champs there either .

again im not saying one way is better than the other. im only making the statement that whether markets are sideways or down vs up makes a difference in the success rate of index funds.

whats interesting is mid-caps had a very good run upwards compared to large caps.. in the mid-cap area 7 fidelity mid-cap funds beat their indexes, 10 did not . indexes were the clear winner as the trend in that arena was up.


more interesting was the internationals which got pounded. 17 fidelity internationals beat their index,only 3 did not.


if you think markets will be headed up index funds are going to most likely outperform . if you think what we have been having the last decade is more typical of what we will be seeing than you may have better odds that the managed funds may out perform the indexes.

i use both types. one portfolio uses VTI total market index for the equity portion. the other portfolio i use is only managed fidelity funds that follow the fidelity insight newsletter .

s&p returned 2.75% over 10 years. heres a look at what others have returned...

http://fundresearch.fidelity.com/mut...al-returns/STK

[mathjak107]

much more important then whether a fund is actively managed or an index fund, is the overall portfolio risk and reward of your entire portfolio..

the idea is to get the return of that index fund but with less risk and volatility.

a chart of a stock fund shows huge swings up and steep valleys down.

the overall long term return is going to be somewhere in between.

the idea of putting together a good portfolio is to reduce those steep peaks and valleys by having less gains and less drops so you meet somewhere in the mid point of where that stock fund ends up over a few years..

by combining assets that work well together you can beat the index fund performance without actually beating the index fund in the up years..

the newsletter i follow strives to put total portfolios together that give you all the gains of that s&p 500 index fund with 10-20% less risk and volatility and they usually do it .

its not by picking the best funds its just by reducing the peaks and valleys and meeting at the same destination point in the middle. some funds may swing way up but in the down years they plunge way down .eventually they average out somewhere in between.


one model i follow is only 25% equities and also contains 25% cash ,yet when combined with its complementary other pieces it smooths out so much it actually beat a 100% investment in a stock fund like the s&p 500 with a fraction of the swings up and down.

[CouponJack]

Originally Posted by mathjak107

then 80% of managed funds may beat the indexes as the the last decade turned out..

Show me data that shows that after taxes/survivorship bias/etc...

I will say Low costs and asset allocation are the most important factors (not index vs. managed). You can have low cost active funds that do very well, but I'm not going to take my chances and guess if a fund manager will beat his respected benchmark.

[mathjak107]

huh?????????????????? im not sure what your comparing here. except for personal taxes if there are any everything else is in the total return so im not following what your asking .

if your talking about the effect after personal taxes its much to varied to be of much use.

with roth 401k's and roths being totaly tax free the turn over rate of a fund is meaningless except as a fund expense and if the total return is good then its good.

the good thing about index funds and etf's is they spin off very little capital gains each year so you may catch a tax break until you sell. a managed fund spins off capital gains every year depending on turnover. the good news is you pay that much less later on when you sell your managed fund..

the bad thing about index funds and etf's is they spin off very little capital gains each year so you may get slammed with a huge capital gain when you sell.

if that capital gain trips the amt tax you will wish you had paid a little bit each year and avoided the big amt penalty.

i never buy an equity fund based on my tax situation. i buy one based on it filling the slot for the goal i want and how i think it will interact with the other funds i own.

buying an index fund and then owning other funds through your 401k that practically duplicate the holdings in the index fund is silly. magellan was exactley the same as owning an index fund at one time. it served no purpose to invest in it in a 401k and then buy an s&p500 fund because you heard they were good.

i personally like low expense funds that blend well together and as many times as i thought about going with all indexing i didnt. i found a working balance that has kept me in the game for 24 years and up about 1200% and im not screwing with it now.

[mathjak107]

one thing i wanted to mention is becareful with expenses on index funds. many index funds have expenses that rival managed funds.

there are quite a few that performed worse than their own index and were beaten by managed funds because of their own expenses.

vanguard and fidelity offer some of the lowest expense index funds.


the other thing is that statistics can be very mis-leading.

as an example: statistically my chances of being mugged where i live is very tiny, but their are certain areas in nyc where i just wont go. i know better because my chances of getting mugged are very great.

the same thing applies to funds, there are consistantly bad funds year after year, there are bad managers who shouldnt be running funds with horrible performance. there are funds that are linked to certain benchmarks that really shouldnt be because they dont fit well. fidelity strategic real return is benchmarked against bond funds is an index as an example of a fund measured against a catagory thats rediculious..

when you weed out alot of these funds as most investors would never buy them except to speculate the odds of managed funds beating the markets increases .

many funds are really sector funds and thrown against broad averages because they arent really sure where to stick them.

fidelity magellan is an example of going where you can get mugged. over the last few decades it fell from 106 billion in assets to 17 billion because of poor performance. that should be on no ones list when it comes to funds to choose from. decades of bad performance says so unless you want to speculate.

the point is statistics can show whatever someone wants so just make sure you dont believe to much as always being true ,and thats anything in life.


the bottom line is when alot of these funds like the magellans of the world are weeded out and those mis-matched to an index are weeded out the statistic of index funds beat 75% of the money managers may not hold true. the fact is like i said above just by staying out of the widely known areas where i can get mugged my odds shrink drastically that i wont be mugged even though taken as a whole when counting in those bad neighborhoods my odds of being mugged are alot higher thn in reality by me staying away.

once the real crap is subtracted off the selection list things change statistic wise.

again im not saying its true or not true,im just saying the statement may not be a real world truth.

Faith in Index Funds Rests on Flawed Research - TheStreet

[LongArm]

Originally Posted by mathjak107

there are quite a few (index funds) that performed worse than their own index...

Well, index funds should ALWAYS perform worse than their own index since, by definition, they basically ARE the index with expenses added.

[mathjak107]

Exactly,and sometimes thats enough to make them perform worse than a managed fund as the article above illustrated..

The fact a fund is an index fund doesnt mean its a low cost index fund. i had a while ago in our 401k a merryl lynch s&p500 index fund which had higher expenses than any of my fidelity managed funds.

[CouponJack]

Originally Posted by mathjak107

huh?????????????????? im not sure what your comparing here. except for personal taxes if there are any everything else is in the total return so im not following what your asking .

if your talking about the effect after personal taxes its much to varied to be of much use.

with roth 401k's and roths being totaly tax free the turn over rate of a fund is meaningless except as a fund expense and if the total return is good then its good.

the good thing about index funds and etf's is they spin off very little capital gains each year so you may catch a tax break until you sell. a managed fund spins off capital gains every year depending on turnover. the good news is you pay that much less later on when you sell your managed fund..

the bad thing about index funds and etf's is they spin off very little capital gains each year so you may get slammed with a huge capital gain when you sell.

if that capital gain trips the amt tax you will wish you had paid a little bit each year and avoided the big amt penalty.

i never buy an equity fund based on my tax situation. i buy one based on it filling the slot for the goal i want and how i think it will interact with the other funds i own.

buying an index fund and then owning other funds through your 401k that practically duplicate the holdings in the index fund is silly. magellan was exactley the same as owning an index fund at one time. it served no purpose to invest in it in a 401k and then buy an s&p500 fund because you heard they were good.

i personally like low expense funds that blend well together and as many times as i thought about going with all indexing i didnt. i found a working balance that has kept me in the game for 24 years and up about 1200% and im not screwing with it now.

All I'm saying is that no one can predict when an up or down market will happen, so I stick w/low cost index funds. Again, I don't know which manager will outperform over the long term and I'm not willing to bet on one. Yes, some managed funds will outperform over the long term after costs (a small percentage), but I'm going to stick w/above average returns and not try to hit a homerun...that's all I'm saying.

I also agree, if you do choose managed funds, stay away from high cost ones...low cost will give you a fighting chance to beat its respected benchmark.