Actively managed funds vs Index funds

**disneysteve** · 03-20-2012, 04:28 AM

I hold index funds, actively managed funds, individual stocks and bonds. Why? Good question. When I first started investing, I didn't know much (if anything) about index funds and our first mutual fund, which we still own, was an actively managed (AM) fund. I had researched what was out there, what had a good track record and a strong management history, so I didn't go in totally blind, and the fund did well for quite some time though it has lagged in recent years and I will probably unload it this year.

Another AM fund that I have a big stake in is a sector fund (healthcare) that has a great track record (avg return since 1984 - 16.36%). I also hold an AM small cap value fund, again with a great track record and strong management history (since 1984 - 12.05%).

As for individual stocks, there are two basic reasons I buy stocks. One is when I get the occasional itch to trade. I may read something in a financial publication, hear something on TV, read something online or yes, even pick up info in an internet discussion forum. I won't buy on a blind tip, of course, but info from various sources may lead me to do more research and decide to buy. Sometimes it is for the short term. Other times it is for a longer time period. The other reason I tend to buy stock is when I have some personal connection to the company. I own Disney stock, for example, and have since the 1980s. In fact, it was the first stock I ever purchased. I also own shares of a local bank that a relative used to be an officer for. He's now retired but I continue to hold the shares as they are doing fine and we're still anticipating a merger or sale once the economy picks up which hopefully will benefit the share price significantly.

Of course, the bulk of our market money is in index funds - S&P 500, Total Bond Market, International Index, etc. I just like the flexibility and, being a gambler at heart, I like the added risk from the AM funds. Some years, they totally smoke the market. One year, one of my AM funds was up over 70%! A 30% return is not unusual, though it could just as well be down 20% the following year.

**LivingAlmostLarge** · 03-20-2012, 07:47 AM

Because the 401k at work only offers actively managed funds!

**thekid** · 03-20-2012, 08:09 AM

Thanks for answers. I was asking basically to test my own way of doing things. I've "bought in" to the random walk premise, but I'm no expert and appreciate other points of view.

I started out owning a few actively managed funds and sector funds (the later were energy funds prior to the run up of gaz prices, such blind luck), then read a few books and was convinced that indexing was likely a better long term bet than trying to time and pick. Since, I'm fully indexed.

My portfolio's breakdown is basically this:

80%-85% equity broken down like this:

- 30% canadian index
- 40% us index (VTI)
- 20% eafa (VEA)
- 10% EM (VWO)

I'm 34 and have a DB pension plan, so I don't mind being that much into equities.

Pretty plain vanilla.

Basic reasoning of indexers is that stock movements are impossible to predict with any acuracy and growth projections (the name of the game in fundamental analysis) are also very hard (if not impossible) to guess better than the market. Basically, the future is tough to figure out. However, I don't want to be dogmatic. I'm open to arguments in favour of managed funds/stock picking.

**LMA** · 03-20-2012, 01:01 PM

There are plenty of good managed funds. Sure they might have higher fees and are managed but if they make your money work harder for you then why not.

I have all three, index, managed and single stocks...real estate too, and that is very managed

.

Anyway, one of the managed funds that I have is a so called "target retirement" fund which invests and balances asset allocation IAW your age and your retirement goal. It has done well over the years and it was the best choice from what my employer offered so it makes good sense.

Index funds are good so I have funds that follow the S&P 500, MSCI Index and all of the stock market. Like you say they are good because they do what they are supposed to which is follow the index.

I also have individual stocks but it's very little compared to my ETF/Funds. It's a combination of light research and some fun. SO far it has worked.

**thekid** · 03-20-2012, 01:18 PM

For those that have managed funds, looking back, do you believe you are ahead by having held them (all of the ones you've held, not just the best) as opposed to indexing?

I'm not against owning anything. I'm for making the decisions that (accounting for risk) are most likely to provide best returns.

The premise for indexing is that although you may win here and lose there by active managing (either yourself or by proxy in professional managed funds), you likely won't come out ahead overall and long term than simply holding the "market". Have you found this to be true in your own experience?

**disneysteve** · 03-20-2012, 01:19 PM

Originally posted by LMA View Post

one of the managed funds that I have is a so called "target retirement" fund

Now there is an area where I think indexing is the way to go. Out of curiosity, what is the annual expense ratio on that managed target fund? The Vanguard target funds, which are indexed, not actively managed, charge 0.18%. That's pretty tough to beat.

The problem, though, is exactly what you encountered and what LAL mentioned. Some employer plans only use actively managed funds, which is criminal IMO. They force you to choose from high cost funds as the only option.

**humandraydel** · 03-20-2012, 04:05 PM

This one is easy! My portfolio consists of:

Vanguard Total Stock Market Index
Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard International Index (FTSE All World ex-US)
Vanguard Total Bond Market Index

**disneysteve** · 03-20-2012, 05:28 PM

Originally posted by humandraydel View Post

This one is easy! My portfolio consists of:

Vanguard Total Stock Market Index
Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard International Index (FTSE All World ex-US)
Vanguard Total Bond Market Index

Love it. I wish I had gone this route. Little by little, I have moved more in that direction though.

**Like2Plan** · 03-22-2012, 07:06 AM

I used to have about 10 individual stocks, but last year I sold all but two and put the proceeds into a target fund. My 401k is in a target fund, too.

**GREENBACK** · 03-22-2012, 09:42 AM

Originally posted by humandraydel View Post

This one is easy! My portfolio consists of:

Vanguard Total Stock Market Index
Vanguard Mid Cap Index
Vanguard Small Cap Index
Vanguard International Index (FTSE All World ex-US)
Vanguard Total Bond Market Index

I have an identical roth in a 20/20 fund. Very easy.

**Petunia 100** · 03-22-2012, 10:54 AM

I think there are some excellent actively managed funds out there. The best tend to have disciplined management and low expenses. Vanguard Wellington and Vanguard Global Equity come to mind.

But I think that the vast majority of us are better off just buying the index. So that is what I do, whenever possible. In my employer's plan where I am limited to load funds, but can buy ANY load fund from any fund family, I just have an American Funds target retirement fund.

**kv968** · 03-23-2012, 04:39 AM

Originally posted by Petunia 100 View Post

I think there are some excellent actively managed funds out there. The best tend to have disciplined management and low expenses. Vanguard Wellington and Vanguard Global Equity come to mind.

But I think that the vast majority of us are better off just buying the index. So that is what I do, whenever possible. In my employer's plan where I am limited to load funds, but can buy ANY load fund from any fund family, I just have an American Funds target retirement fund.

Do you have an IRA that's maxed out? If not, I'd suggest doing that before investing in your employer's plan with the loads. Unless of course there's an employer match which you should contribute only up to that amount first then over to an IRA.

**Ochayebeers** · 03-24-2012, 02:08 PM

This debate will never be solved!

I guess my take on it is if you have no faith in your adviser's ability to identify the roughly 20% of active funds that beat the index consistently then you should go passive but make sure it's very cheap! Pay no advice fees, commission and the fund charges should be 0.3% max!

However, if you have backtested an adviser's actively managed risk-rated model portfolios and they have outperformed, and he understands market sectors and explains this to you, monitors funds and replaces them if they start to drag, then you should go active. Beta is all well and good but it is Alpha that really builds wealth.

I should also say that the S&P 500 is hard to beat as it is an efficient market but this is not true of other markets! Perhaps European funds are an idea now as there are many fine companies in Europe trading at huge discounts due to the Eurozone crisis caused by inept governments.

Cheers,

Les

**Petunia 100** · 03-24-2012, 02:35 PM

Originally posted by kv968 View Post

Do you have an IRA that's maxed out? If not, I'd suggest doing that before investing in your employer's plan with the loads. Unless of course there's an employer match which you should contribute only up to that amount first then over to an IRA.

Yes, I receive a 100% match on the first 3% of my salary. So I contribute enough to get that, then I contribute to my traditional and/or Roth.

Actively managed funds vs Index funds