re: Investing Advice for a Noob

quote:

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I sure thought it was, but it's tough to convince the Bogle-Heads sometimes. BTW, I found 7 more index beaters just in American Funds alone. lol

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You guys done blathering on yet?

American Funds equity funds were hemorrhaging shareholder withdrawals in 2008/2009. No active fund with a mandate to hold 90% or more of fund assets in equities is going to protect a retail investor in a downmarket. Growth Fund of America has over $110B in assets under management and will not likely perform as it did when it was a much smaller fund (look at its performance from 2008 forward), plus you would have to adjust SPY to be able to allocate up to 25% of its holdings in international equity to replicate what GFA can do. That fund will most likely be a index hugger in the future, and indexers can diversify their holdings to gain more appropriate global and factor exposure. To boot, American Funds, even those with a load if held long enough, but especially those classes of shares found in retirement plans, do have relatively lower costs than the universe of funds. Which brings me to this study:

LINK

"Two conclusions can be drawn from this chart. First, there is a clear trend in each time period of lower costs leading to higher relative performance. Second, although this trend is positive, it does not by itself lead to identifying active funds that will consistently outperform the comparable index. Indeed, if we look at the aggregate average of the four different time periods, we find that the lowest-cost 50% of the funds in the universe produced a 23% probability of outperforming the benchmark, while the lowest-cost decile of funds (the least expensive 10% of funds in the universe) produced a 32% probability of outperforming the index.

It should be noted that the graph is calculated relative to costless benchmarks. If we lower the benchmark returns by 20 bps to compensate for the cost of investing in a low-cost index fund, the probability of the lowest-cost funds succeeding rises from 32% to 40%.

As a result, although low cost has proven to be the most consistent and effective quantitative factor that investors can use (ex-ante) to noticeably improve their odds7, it does not, by itself, guarantee success. Instead, for investors to achieve success using active management, a combination of both low cost and talent are needed.

Identifying talent
How can investors identify talented managers? While there has been a plethora of academic studies that offer shortcuts for identifying a skilled active manager, much of the industry has settled on using some variation of the “4 Ps” cited by Vanguard founder Jack Bogle in 1984—people, philosophy, portfolio, and performance8. Vanguard still uses a similar version of these criteria today:"

Yeah, it is a Vanguard study, but certainly makes some valid points. To each his own. I own indexed and managed and lose no sleep over it.