Index funds vs actively managed mutual funds

[Anonymous]

Inspired by a response to the Dave Ramsey thread, wanted to ask: what do you guys think of index investing? If you’re an investor, which do you do and why?

[Anonymous]

I have neither the time nor the inclination to soend time trying to beat the market. Dave Ramsey is full of shit on this issue.

[Anonymous]

Anonymous wrote:I have neither the time nor the inclination to soend time trying to beat the market. Dave Ramsey is full of shit on this issue.

+100 and some others.

[Anonymous]

Active investing is for suckers. Any accidental gains when they get lucky would probably be wiped out by the extra fees anyway.

Go with low cost mutual funds with low expenses. Vanguard is popular for a reason. Aim for no more than half a percent in fees. (And preferably much lower)

[Anonymous]

Anonymous wrote:Inspired by a response to the Dave Ramsey thread, wanted to ask: what do you guys think of index investing? If you’re an investor, which do you do and why?

Think about how he makes his money. That should explain why he pushes for active.

[Anonymous]

We only invest in index funds through Vanguard these days. We made this change after I started looking at the fees we were paying on our actively managed mutual funds that were in an actively managed account.

Most friends I speak to have a sense of the performance of their investments but not the fees. The fees can really add up and undercut performance gains.

I’ll add that I feel less burdened by investing in index funds. I’m placing my faith in the markets than in the fleeting brilliance of one fund manager or another. I no longer worry about whether I’ve made the right investments.

My brother is in finance and has argued with me that some funds do consistently outperform the markets but I have no confidence that I’ll pick the right funds. I’m not in finance and have found that those in finance really do have the upper hand at the expense of average investors.

[Anonymous]

As others have pointed out there are actively managed funds that beat the market but the problem is finding the few that (consistently) can do it. And because they did it the past month/quarter/year does not mean that by the time you buy it it will continue to do so. Then there are the fees, to include load fees every time they are traded.

I'm a low cost index funder as well but do have a few individual stocks and sector funds to play with.

[Anonymous]

Let’s say half —50% - the active funds make selections that beat the market in a given year. That’s mathematically the most logical expectation.

If you account for fees of active management, you’re down to about 40% of them beating the market net of fees.

Then you have to account for taxes incurred by the managers’ active trading. Now it’s 30% beating the market net of fees and taxes.

Now...which 30%? There’s no demonstrated repeatability. In other words, a fund that’s in the lucky 30% one year has not shown any increased likelihood of being in that 30% in subsequent years. Investment companies work around this by closing funds that happen to have poor track records, and this way they can show you that an impressive number to f their (remaining) funds have beaten the market. This is called survivorship bias.

Picking funds is just guessing, and the odds are stacked against you.

The longer you buy and hold index funds, the more the tax advantage of deferred capital gains compounds in your favor.

[Anonymous]

100% index investor here. Set it and forget it.

[Anonymous]

I agree with the sentiments here, and that’s sort of what worries me. If everyone invested this way, wouldn’t it be fair to say stock prices would stop impounding accurate company data quite so effectively, leading to the market not really functioning as we’ve come to expect? Not that I’m going to go try to pick an actively traded mutual fund as a result but still...

[Anonymous]

Anonymous wrote:I agree with the sentiments here, and that’s sort of what worries me. If everyone invested this way, wouldn’t it be fair to say stock prices would stop impounding accurate company data quite so effectively, leading to the market not really functioning as we’ve come to expect? Not that I’m going to go try to pick an actively traded mutual fund as a result but still...

Index investing is still relatively small part of market.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I agree with the sentiments here, and that’s sort of what worries me. If everyone invested this way, wouldn’t it be fair to say stock prices would stop impounding accurate company data quite so effectively, leading to the market not really functioning as we’ve come to expect? Not that I’m going to go try to pick an actively traded mutual fund as a result but still...

Index investing is still relatively small part of market.

Yeah but it’s blowin up

[Anonymous]

Anonymous wrote:I agree with the sentiments here, and that’s sort of what worries me. If everyone invested this way, wouldn’t it be fair to say stock prices would stop impounding accurate company data quite so effectively, leading to the market not really functioning as we’ve come to expect? Not that I’m going to go try to pick an actively traded mutual fund as a result but still...

You are right. Index funds are based on the random walk theory. If almost everyone were to invest on this basis, an advantage would accrue to the few who used their special market insights to pick and choose individual stocks. But I do not see this scenario unfolding anytime soon.

[Anonymous]

Also, most people don’t have truly specialized information needed about an industry or company enough to beat the market, and if they do have something good it would probably be insider trading to act on it. So yeah, index investing is safest for the largest return in the long run.

[Anonymous]

Anonymous wrote:I agree with the sentiments here, and that’s sort of what worries me. If everyone invested this way, wouldn’t it be fair to say stock prices would stop impounding accurate company data quite so effectively, leading to the market not really functioning as we’ve come to expect? Not that I’m going to go try to pick an actively traded mutual fund as a result but still...

I've wondered this, too, and read a lot of arguments on both sides.

My thinking is that there remain plenty of people who are eager to find and exploit any opportunities (to buy or short) that the indexers will miss. Those people are essential to preventing what you talk about, but as long as we have enough of them keeping an eye on things, the indexers, somewhat paradoxically, will come out ahead.