« I Want My Kids (and Myself) to Live This Poem | Main | Congrats to Allan Roth for Getting His Book Reviewed in the NY Times! »
SmartMoney (or Maybe DumbMoney): Is the Index Fund Dead?
By JLP | April 12, 2009
Just got my May issue of SmartMoney. On page 15 of the magazine is an article titled, “Is the Index Fund Dead? With the S&P going nowhere for 10 years, some index investors look for other options.” (Sorry, there’s no link yet)
From the article:
It’s heresy to academics, and we can already hear the howls of protests at the very suggestion. But the stock market’s crash does beg the question: Is it time to move beyond the vanilla index fund?
It goes on:
…now is exactly the time many experts say that active management can shine. If markets bounce along the bottom (as many strategists think we’ll see this year), active managers could have an edge. Roseen says that’s because they can pare back on certain troubled sectors (think financials) and “make the appropriate bets.” Since the crash, the average actively managed fund is neck and neck with the average S&P 500 fund, according to Lipper. In six of the past 10 years, more than half the actively managed funds have beaten their index.
Where do I start??????
First off, the SmartMoney article was written with the market’s crash in hindsight. Investing via a rearview mirror is almost never a good way to go. Their comment about more than half of the actively managed fund beating their index in six out of the last ten years is flawed thinking because it’s past history. Just because a fund beat the index in the past does not mean it will beat again in the future and the FUTURE is what we are concerned with.
Second, NOBODY knows what the market is going to do in the future. Selling a depressed index fund now in order to buy an actively managed fund (that has no guarantee of beating the index in the future) just doesn’t seem like a wise move in my opinion. Seriously…I wonder how many of these “strategists” saw last year’s dismal market coming?
SmartMoney should know better than to write this crap.
Topics: Index Funds, Investing | 16 Comments »
April 13th, 2009 at 6:16 am
Interesting article. If they ever had a case, it would be right now.
However, I wonder what the validity of what they mean by greater than half of actively managed funds beat out index funds. First, is this after-taxes and expenses. Second, which actively managed funds did they include. If they included actively managed funds containing bonds, that statement would be true, but would be meaningless.
What most people forget is indexing consists of indexing in stocks and bonds.
April 13th, 2009 at 7:20 am
I agree.. We need to make sure they are comparing apples to apples and taking expenses into consideration.
Funny how most people are “buy-and-holders” when the market is going up and traders when the market is down. This is natural human behavior and knee-jerk reaction at its best.
April 13th, 2009 at 8:38 am
I’m pretty unimpressed with SmartMoney’s use of statistics, only part of the statistics are there. You can always add and drop statistics to “prove” your point, but unless there all there, it doesn’t mean anything.
So 6 out of 10 years these other funds did better. How much did these funds do better by, a quarter of a percent? Did the index funds do super the other 4 years, and over the past 10 years, blow the other funds out of the water? Just because index funds broke even over 10 years, the other funds may have actually gone down.
Unfortunately, SmartMoneys lack of statistics to create a sensationalized story only gives its readers bad and incomplete investing advice. People need to beware.
April 13th, 2009 at 8:40 am
I agree as well! The article states some active funds are beating the index, but what index?! As a previous poster mentioned, if the active fund contains bonds and cash it most certainly outperformed the S&P over last year, but so did the 2nd Grader portfolio.
April 13th, 2009 at 2:12 pm
I agree that a publication like Smart Money could have put a little more effort into research and statistics and nobody knows where the market will go in the future…but… and index is just an average of its underlying parts, and so many people forget this basic point.
Underneath almost every index, at almost anytime, there exists strong performing industry sectors, and weak performing sectors. Add them all up + average the result and you get the market index.
If you start to breakdown the average index into its underlying sectors, It becomes easier to see what is driving the gains or losses for the market index overtime.
Why should you have to buy all the dud industries or stocks, when you could simply narrow your focus on a few of the top performing sectors? Review this a few times per year, keeping in the top sectors underlying the index and you have the beginnings of a portfolio that can start to outperform that average index.
I’ll never buy a generic index fund again with so many low cost sector and industry ETFs available out there.
April 13th, 2009 at 2:59 pm
Don’t forget that SmartMoney makes its money from ads for managed funds.
April 13th, 2009 at 3:32 pm
I’m surprised they didn’t talk about fees and the fact that the index funds still beat 60% of active mutual fund managers.
April 13th, 2009 at 6:11 pm
I do not trust Smart Money at all. I used to get the mag for free, but would never pay for it. There is better investment advice available from other magazines or websites (like this).
April 13th, 2009 at 7:51 pm
Also:
What were the fees of the actively managed funds – did they outperform after fees were taken out?
What sectors did these funds cover and what is their record long term? For example, if they were commodities then they may well have out performed over the last 10 year calendar period, but may have lagged every year for the 20+ prior.
April 14th, 2009 at 6:56 am
“Why should you have to buy all the dud industries or stocks, when you could simply narrow your focus on a few of the top performing sectors?”
Sounds suspiciously like market timing to me.
April 14th, 2009 at 3:27 pm
One million percent of all statistics are exaggerated.
But seriously what does their assertion mean? Let’s take a look at that statement again:
“… the average actively managed fund is neck and neck with the average S&P 500 fund …”.
What’s an “average S&P500” fund? A passively managed fund, an index fund, tracking with a well known index, such as the S&P500, has by definition the objective of matching the performance of a target index. So let’s rephrase their assertion:
“… the average actively managed fund is neck and neck with the S&P 500 index …”.
Let’s then give them the benefit of the doubt that they’re talking about actively managed funds that are comprised of large cap US stocks. That is after all what the S&P500 index is. To compare an actively managed fund comprised of say small cap, sector or international stocks with the S&P 500 index is not a fair comparison. It would be like comparing apples to oranges.
Let’s talk about cost. Actively managing funds means incurring overhead in terms of management fees, transaction costs, advertising and that one bugaboo nobody likes to talk about – taxes. “Actively managing” means a lot of turnover or churn.
Now let’s drag passively managed index funds back into the discussion. Index funds have low overhead, low turnover and are typically quite tax-efficient.
Are they saying that the performance of a select group of the actively managed funds are on par with the S&P500? Yes? Well then bravo. That means that for all the effort (and cost) in actively managing those funds they performed as well as or better than the target index and by extension the target index funds. Really? Even after adjusting for the much higher costs?
The whole discussion reminds me of that WB cartoon where the greyhounds (actively managed funds) are chasing an electronic rabbit (passively managed funds) around the track. Some dog are faster than others. But the bunny always finishes and usually finishes first.
Be the bunny.
April 14th, 2009 at 3:42 pm
“… the average actively managed fund …” – Ha!
Don’t even get me started on the subject survivorship bias.
April 15th, 2009 at 11:09 am
What zed said; say that three times fast! Like he mentioned, comparing active funds to the S&P is apples to oranges. Most actively managed funds contain S&P companies, international, bonds, and cash. If you look at the active funds asset allocation and then compare that fund’s return to a compilation of index funds with the same allocation you will notice the advantage of the index funds. ie:
60% – Vanguard Tot Stock Idx
30% – Vanguard Total International Stock Index
10% – Vanguard Total Bond Market Index Fund
May 5th, 2009 at 3:04 am
Hi,
During elections time stock market act very weird. One has to be very careful while doing trading and investments in Indian stock market .
If you have any doubt please feel free to contact us.
Regards
Regards
SHARETIPSINFO TEAM
October 9th, 2010 at 2:10 am
nice article
December 18th, 2010 at 7:49 am
Hi , Very good information you are providing at here . Thanks for your knowledege , it vreally helps me a lot.
Regards
Anjali