Comments on: Surprise! Mutual fund cheerleaders fault indexing http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/ Helping you invest and prosper Sun, 12 Feb 2012 00:54:40 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Friday Linkstuff http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-151301 Friday Linkstuff Fri, 29 Aug 2008 09:01:16 +0000 http://www.canadiancapitalist.com/?p=1193#comment-151301 [...] Capitalist wrote a post commenting on a study written by a mutual fund analyst that apparently proves that index funds are [...] [...] Capitalist wrote a post commenting on a study written by a mutual fund analyst that apparently proves that index funds are [...]

]]> By: Dillon http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150744 Dillon Wed, 27 Aug 2008 00:56:40 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150744 The Investment Reporter @ 12 and Fred @ 16 suggest stock-picking and market-timing/leverage, respectively, as ways to beat an indexing strategy. While I don't discount these strategies (since I accept that there are inefficiencies in markets that can be exploited), the problem with both of these approaches is that they require not insignificant amounts of skill and effort in order to be effective. If you can consistently beat the market by engaging in stock-picking, market timing, sector rotation, technical analysis or whatever, then good for you. I think I'll stick with indexing, though. The Investment Reporter @ 12 and Fred @ 16 suggest stock-picking and market-timing/leverage, respectively, as ways to beat an indexing strategy.

While I don’t discount these strategies (since I accept that there are inefficiencies in markets that can be exploited), the problem with both of these approaches is that they require not insignificant amounts of skill and effort in order to be effective.

If you can consistently beat the market by engaging in stock-picking, market timing, sector rotation, technical analysis or whatever, then good for you. I think I’ll stick with indexing, though.

]]> By: Fred http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150730 Fred Tue, 26 Aug 2008 23:56:48 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150730 There is yet another approach that hasn't been raised in this discussion thus far: using ETF's and market timing as I am. Buying ETF's doesn't necessarily mean buy-and-hold forever (aka buy-and-forget-to-sell). I have gone a step farther and buy double exposure ETF's when my timer goes long. The backtested results are on my blog but the time-frame is short given the recent introduction of double exposure ETF's. Any yes I know, studies have shown that you can't time the market. Fact of the matter is that you don't have to be right all the time. According to Ken Fisher a 60% success rate will put you well ahead of buying and holding the market. Also, you don't have to short the market when a timer goes short - you may be more comfortable in a bond ETF as I am. As for the comments from the advisors, it is too bad that most investors will not pay for a fee-only service. I think people prefer hidden fees (e.g. hidden excise tax versus exposed GST) and that's unfortunate. There is yet another approach that hasn’t been raised in this discussion thus far: using ETF’s and market timing as I am. Buying ETF’s doesn’t necessarily mean buy-and-hold forever (aka buy-and-forget-to-sell). I have gone a step farther and buy double exposure ETF’s when my timer goes long. The backtested results are on my blog but the time-frame is short given the recent introduction of double exposure ETF’s. Any yes I know, studies have shown that you can’t time the market. Fact of the matter is that you don’t have to be right all the time. According to Ken Fisher a 60% success rate will put you well ahead of buying and holding the market. Also, you don’t have to short the market when a timer goes short – you may be more comfortable in a bond ETF as I am.

As for the comments from the advisors, it is too bad that most investors will not pay for a fee-only service. I think people prefer hidden fees (e.g. hidden excise tax versus exposed GST) and that’s unfortunate.

]]> By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150694 WhereDoesAllMyMoneyGo.com Tue, 26 Aug 2008 18:04:50 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150694 Venter - You are correct in that it is not simple. I am also an advisor and also looked to more experienced advisors for guidance - it is a hard thing to think for yourself when successful peers and mentors are following the herd, but my guess is that newer advisors are more inclined to listen to the debate between active versus passive. But being paid on commissions and being expected to do what's in someone else's best interest is a structural paradox that most advisors have to deal with. Even salaried advisors are pressured into promoting certain products or hitting quotas. The industry is... funny. I started at an MFDA firm myself, and switching to IIROC (IDA) was well worth it. I felt a bit handcuffed by being restricted in what I could advise on. But many firms allow advisors to offer fee-only planning - my old MFDA firm did and so does my current IDA firm. Again, paradoxically, not many people opt for it even though it may be the best option from a numbers point of view. People are funny too! :) Venter – You are correct in that it is not simple. I am also an advisor and also looked to more experienced advisors for guidance – it is a hard thing to think for yourself when successful peers and mentors are following the herd, but my guess is that newer advisors are more inclined to listen to the debate between active versus passive. But being paid on commissions and being expected to do what’s in someone else’s best interest is a structural paradox that most advisors have to deal with. Even salaried advisors are pressured into promoting certain products or hitting quotas. The industry is… funny.

I started at an MFDA firm myself, and switching to IIROC (IDA) was well worth it. I felt a bit handcuffed by being restricted in what I could advise on. But many firms allow advisors to offer fee-only planning – my old MFDA firm did and so does my current IDA firm. Again, paradoxically, not many people opt for it even though it may be the best option from a numbers point of view. People are funny too! :)

]]> By: venter http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150691 venter Tue, 26 Aug 2008 17:35:15 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150691 WDAMMG- I appreciate your comments but nothing is that simple. I was just making the point that it would be difficult for new advisors to make a living on index funds alone, this was not my motivation for my clients investments . I should also point out many of my choices were initially influenced by recommendations I received from my peers, advisors at my firm who had many years of experience. None of them ever suggested index funds when I started. I have debated the index vs active for a while and have only recently started to consider using index funds. Most of my clients were transfers and had DSC's. I used LL funds to rebate their fees and placed many of them into portfolios that I felt were best for them at the time. I will likely use more index funds going forward as a core and perhaps move some existing clients when their DSC schedules expire. I currently have no access to ETF's (MFDA only). I would also point out that I have no index funds in my own portfolio yet ( stocks, bonds, REITs, GIC's, active mutual funds). WDAMMG- I appreciate your comments but nothing is that simple. I was just making the point that it would be difficult for new advisors to make a living on index funds alone, this was not my motivation for my clients investments . I should also point out many of my choices were initially influenced by recommendations I received from my peers, advisors at my firm who had many years of experience. None of them ever suggested index funds when I started. I have debated the index vs active for a while and have only recently started to consider using index funds. Most of my clients were transfers and had DSC’s. I used LL funds to rebate their fees and placed many of them into portfolios that I felt were best for them at the time. I will likely use more index funds going forward as a core and perhaps move some existing clients when their DSC schedules expire. I currently have no access to ETF’s (MFDA only). I would also point out that I have no index funds in my own portfolio yet ( stocks, bonds, REITs, GIC’s, active mutual funds).

]]> By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150685 WhereDoesAllMyMoneyGo.com Tue, 26 Aug 2008 16:50:06 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150685 Venter - you are basically saying that you aren't willing to make the recommendations you would like to until a later date. This conflicts with your fiduciary duty in which you are supposed to act in the clients' best interest above your own. If you truly believe that you would make these changes, but can't because of personal financial reasons, then you should look to joining a larger team who shares your philosophy. Join them as an associate so you have a base and then slowly you can branch off when you are financially able to, or you can acquire their book later on. Otherwise, you are subject to sanctions and could lose your license. Re: the Nortel effect - a null and void argument these days with the ETFs that tracks the capped composite indices - not allowing for more than 10% exposure to any one security. Venter – you are basically saying that you aren’t willing to make the recommendations you would like to until a later date. This conflicts with your fiduciary duty in which you are supposed to act in the clients’ best interest above your own. If you truly believe that you would make these changes, but can’t because of personal financial reasons, then you should look to joining a larger team who shares your philosophy. Join them as an associate so you have a base and then slowly you can branch off when you are financially able to, or you can acquire their book later on. Otherwise, you are subject to sanctions and could lose your license.

Re: the Nortel effect – a null and void argument these days with the ETFs that tracks the capped composite indices – not allowing for more than 10% exposure to any one security.

]]> By: The Investment Reporter http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150680 The Investment Reporter Tue, 26 Aug 2008 15:57:46 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150680 OK here’s the third point of view. If you’re willing to invest in individual stocks, you will come home with much better returns than you will with active or passive mutual funds. A portfolio of high quality stocks — conservative, fundamentally sound, dividend-paying stocks for the most part — will knock them all off. Active equity funds or indexed funds. Admittedly, this is our bread and butter as a Canadian stock advisory, but our experience has born this out over the years. The question is: are you an active investor or a passive investor? If you want to be active, you have to trust your advice, trust your judgment and trust your broker. And why not? Most fund managers seem to be following each other around the mulberry bush, anyway. If you go out and corral a bunch of speculative stocks, you’re liable to get whacked, of course. But with a conservative portfolio of stocks you should feel perfectly confident in any contest with index funds, and even more so with the vast majority of active funds. OK here’s the third point of view. If you’re willing to invest in individual stocks, you will come home with much better returns than you will with active or passive mutual funds.

A portfolio of high quality stocks — conservative, fundamentally sound, dividend-paying stocks for the most part — will knock them all off. Active equity funds or indexed funds. Admittedly, this is our bread and butter as a Canadian stock advisory, but our experience has born this out over the years.

The question is: are you an active investor or a passive investor? If you want to be active, you have to trust your advice, trust your judgment and trust your broker. And why not? Most fund managers seem to be following each other around the mulberry bush, anyway.

If you go out and corral a bunch of speculative stocks, you’re liable to get whacked, of course. But with a conservative portfolio of stocks you should feel perfectly confident in any contest with index funds, and even more so with the vast majority of active funds.

]]> By: venter http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150679 venter Tue, 26 Aug 2008 15:57:44 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150679 As an advisor that has only been building my business for a little under 2 years I can tell you that I couldn't afford to put all my clients in index funds even if I wanted to. I make less than 25k a year now! If I had a large client base with that had been built up over the years I would not hesitate to move the core of many portfolios into indexes and use some of the better managed funds to capture themes and further diversification. As some posters have pointed out, many investors are not comfortable with index funds in lieu of the Nortel effect. As an advisor that has only been building my business for a little under 2 years I can tell you that I couldn’t afford to put all my clients in index funds even if I wanted to. I make less than 25k a year now! If I had a large client base with that had been built up over the years I would not hesitate to move the core of many portfolios into indexes and use some of the better managed funds to capture themes and further diversification. As some posters have pointed out, many investors are not comfortable with index funds in lieu of the Nortel effect.

]]> By: Canadian Capitalist http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150667 Canadian Capitalist Tue, 26 Aug 2008 13:46:45 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150667 mjw: Indexing is supported by logic and overwhelming evidence. If any thing, you need blind faith in active management. You raise good points about the narrow and shallow nature of the TSX but that can be easily addressed with a diversified portfolio. My benchmark Sleepy Portfolio has just 20% in Canadian stocks, out of the 70% devoted to equities. Indexing also doesn't mean putting 100% in the TSX - it is simply using the broad market to capture exposure to the Canadian equity portion of the portfolio. strikershank: In theory, yes, an active fund could be more broadly diversified than the TSX index, which as you point out is concentrated in three sectors. And deviating from the index, by definition, means tracking error. But, that's not the only source of tracking error. The fees form a high hurdle that precious few funds manage to overcome and it's hard to tell which ones will in advance. mjw: Indexing is supported by logic and overwhelming evidence. If any thing, you need blind faith in active management. You raise good points about the narrow and shallow nature of the TSX but that can be easily addressed with a diversified portfolio. My benchmark Sleepy Portfolio has just 20% in Canadian stocks, out of the 70% devoted to equities. Indexing also doesn’t mean putting 100% in the TSX – it is simply using the broad market to capture exposure to the Canadian equity portion of the portfolio.

strikershank: In theory, yes, an active fund could be more broadly diversified than the TSX index, which as you point out is concentrated in three sectors. And deviating from the index, by definition, means tracking error. But, that’s not the only source of tracking error. The fees form a high hurdle that precious few funds manage to overcome and it’s hard to tell which ones will in advance.

]]> By: Four Pillars http://www.canadiancapitalist.com/surprise-mutual-fund-cheerleaders-fault-indexing/#comment-150560 Four Pillars Tue, 26 Aug 2008 11:14:02 +0000 http://www.canadiancapitalist.com/?p=1193#comment-150560 MJW - I'd like to point out that not all index funds are equity. If I want to replicate a balanced fund I can buy some equity and some bond. Striker - you make a good point that not all funds should be compared to a broad index but the fact is that most of the largest equity funds in Canada are index-huggers so if you own one of those - then index funds are a good alternative. MJW – I’d like to point out that not all index funds are equity. If I want to replicate a balanced fund I can buy some equity and some bond.

Striker – you make a good point that not all funds should be compared to a broad index but the fact is that most of the largest equity funds in Canada are index-huggers so if you own one of those – then index funds are a good alternative.

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