Submitted by Catchthedisc t3_10pe5np in personalfinance
I have index funds, and managed funds, and having a mix of both is part of my diversification strategy. There is such a drum beat for index funds, that i wonder if i am unwise to hold managed funds. My managed fund does a bit better than the index funds, especially during the downturn. Anyone else have this strategy?
Yea, the expense ratio is high.
is your managed fund still doing better even after fees? That's the usual issue - the fees often are more than the "gains" from active management.
Not sure honestly.
You should find out man. Best to know what you’re paying and why you’re paying it. Managed strategies aren’t bad and can be really successful but you need to know what you’re actually paying for so you can determine if it’s right for you.
>Best to know what you’re paying and why you’re paying it
Any tips for how to readily find that out?
Gains minus fee. Compare result to gains in index fund.
Check the fund profile online. It will tell you the fund's returns over various time periods (always reported after expenses, by law) & the returns of the fund's benchmark (usually an index).
The profile will also disclose the fees, including the expense ratios, loads, 12b-1 (marketing) fees, etc.
Thanks!
Forgot the mention: you should have been offered a prospectus for each fund before you bought it. Each fund should also provide an annual report. This information should be in these documents, too
Call your broker and have them explain the product and it’s value. If you really want to see if they’re trying to give you a poop product tell them you’re not sure and you think you need advice and then see how the advisor treats you/what they say to you. Should give you a good sense of what’s up.
Ah, great idea. Thanks.
Customer service doesn’t necessarily equal good value when it comes to funds…
Managed funds usually exist to make the managers money.
The only thing that matters in investing is your post-fees, post-tax returns. Anything else is deceiving.
Thank you, this is a good reminder. I am going to look at my statement and see the how the fees are impacting the return.
Does it matter if you're looking at the after charge return?
Some funds are worth it and some arent.. the index fund is simple because it just follows a pattern. If the underlying index does ok an index fund will be fine..
Active funds can do better but they're more hands on to manage and monitor..
Perhaps your managed fund has done a bit better, but past results are not an indicator of future of returns, so no one knows if it does better
Studies have shown that most active managers underperform their targets (net of fees) over the long term.
If it’s a small percentage of your overall assets and if it makes you feel better, go ahead. But I wouldn’t put more than 5-10% of my long term assets in actively managed funds.
I believe it’s 80-90% of active funds underperform the indexes after fees, etc. Plus your tax liability is going to be higher with an active fund
[deleted]
Thank you. I does make me feel better to have 1 fund where someone is minding the store. I hear you on keeping it a small part of my portfolio.
With an index fund, thousands of someones are minding the store & we investors don't have to pay them
> I have index funds, and managed funds, and having a mix of both is part of my diversification strategy.
You can opt for a target date fund and be fully diversified with one fund.
Diversification is not investing in multiple funds that have similar holdings.
Right, good point.
Not very many managed funds beat indexes over a long period of time especially when you consider expense ratios. In addition, actively managed funds tend to have larger capital gains distributions (meaning you get to pay your taxes annually instead of years or decades later).
Note that I didn't say there are none.
If I remember correctly is 90% underperform the index which is insane. Unless OP found that 10% they should move to index imo
Are you comparing your managed fund to a comparable index? For example, if you are using an active Growth Equity Fund you wouldn't compare it to an S&P500 index fund, you'd compare it to a growth equity index fund like FSPGX
Yes, over time the evidence is quite strong that index funds outperform managed funds when adjusting for the risk taken.
The expected return of a managed fund is the return of the market minus costs - even if there are indeed managers out there who can consistently outperform the market, why would you think your ability to identify them is better than your ability to identify the stocks that will outperform?
And if your ability to do so really is that good you probably should either be working for fund company in hiring or open your own.
Being in managed funds and index funds does not give you any diversification benefits. Its entirely dependant on what's inside each.
You can have a mutual fund and index funds that have a very similar selection of equities. The only thing giving you diversification would be if your mutual funds had other products inside. You could purchase those diverse products yourself without paying the ridiculous management fees.
[removed]
Read this one book that hates advisor managed funds!
I'm seconding the answer provided by u/Agile-Television-462
Here is a link to the actual bet:
Warren Buffett posted the challenge on the Long Bets site and it was accepted by Protege Partners.
Jeff Bezos once asked Warren Buffett: "You're the second richest guy in the world. Your investment thesis is so simple. Why don't more people just copy you?"
To which Buffett replied, "Because nobody wants to get rich slow."
Edit:
Source: https://www.ithacawealth.com/iwm-blog/getting-rich-slowly
[removed]
Research shows that actively-managed funds beating comparable index funds is a matter of not many, not by much, & not for long.
Not many actively-managed funds beat comparable index funds over any particular time period. Usually fewer than 20% in a year. Even fewer for longer time periods.
The actively-managed funds that do win usually don't win by much. Those that lose usually lose by a lot more.
The actively-managed funds that do win usually don't win for long. The percentage of funds that wins in one time & then wins again in the next time period is about what would be expected based on random chance. So of the 20% or so that win one year, only about 20% will win again the next year. In other words, they probably won because of luck, not skill.
Standard & Poors published their Index vs. Active report and their Persistence report every 6 months; they document these points very consistently
do managed funds do better net expenses?
Rarely. When they do, it's usually not by much & not for long
Some managed funds do beat the market. Retail investors are rarely the ones that can figure out which is which. Even with heavy research it’s hard to wonder if the juice is worth the squeeze. Probably not a major mistake, but you are more likely to come ahead focusing on minimizing the fee drag.
>Retail investors are rarely the ones that can figure out which is which
I am surely not going to be able figure it out. Thanks for the advice. It is never too late for me to minimize the fees. Thank you.
On etrade I find even mutual funds boasting of better returns than index funds tend to underperform on a 5 year/max scale. One of the biggest problems with portfolio reporting is that they use arithmetic averages when geometric average is the only one that matters. Unless you have enough money to put into a top tier hedge fund, indexed etf will probably be your best bet for performance/value
Here’s your answer: The Warren Buffett Challenge — hedge funds vs. index funds.
wow. I didn't know about that.
Not a actively managed person but the only valid argument I’ve heard is that it can provide returns that are uncorrelated to the market. If you want to go into active that’s how I would go about it
For how many years has your managed fund beat the index fund? If you've held both for less than 3 years, anything's possible in the short term. Longer term? Might be different.
As others state, find the fees. And then realize one or two percent may not seem like a lot...but that's actually a fee that directly impacts what you are actually gaining. If you have a 2% fee, and the fund goes up 6%... you've paid 30% of your gain in fees.
These of course are not real numbers, just used for a basic example.
With long term investing of course, that ratio becomes catastrophic.
This is where the minute or zero fees of common index funds really shine.
Also these past few years have been pretty wild with the massive gains since 2016 and then the relative drop these past couple years.
But yea, it's all about the fees.
Actively Managed fall behind index:
Another thing you should consider is that when you mix managed and index funds in the same asset classes, you're often just investing in the same underlying assets just a using a different vehicle with a fee.
Year in and year out my ETFs do better than my managed funds. Therefore their allocation increases. I haven’t been in it long but the one thing that has done better is my managed fund that mirrors the S&P 500 but tax loss harvest every month. On a tax adjusted basis that’s done better
> Year in and year out my ETFs do better than my managed funds
Wow really, that's helpful to know. thanks.
Rave-Unicorn-Votive t1_j6jvofv wrote
>My managed fund does a bit better than the index funds,
How much are you paying for that "bit"?