long term investment question

[bdckr]

Some more comments about active management and indices:

If the markets are so efficient, why have some funds outperformed the S&P 500 over long periods of time?

Some mutual funds have indeed outperformed indexes over long periods of time, but the number of outperforming funds is no different than what we would expect from random chance. This does not prove that mutual fund performance is random, but it does mean that we cannot disprove that relative performance is based on luck. More importantly, the seemingly random pattern to mutual fund returns indicates that there is no consistent means of selecting mutual funds which will outperform in the future.

The idea that investment returns might be simply a product of chance might ruffle a lot of feathers in the investment business, but is an idea supported by extensive academic research. Many studies have shown that over long periods of time, most equity investment managers underperform relevant indices by about as much as they charge in fees and incur n trading costs.

And mutual fund managers often under-perform their target index due to advisory fees, transaction costs and operating expenses. According to the Vanguard Group, broad stock market indexes have outperformed the average general equity fund over time.

When "mutual fund experts" are asked to pick mutual funds that they think will beat the market, they almost always fail, typically with disastrous results. In 1998, ten mutual fund experts were asked by USA Today to pick two mutual funds for the year. None, none, were able to pick a fund that beat the market. Studies show that picking mutual funds on the basis of past performance does not work, and saints preserve anyone who picks mutual funds on the basis of screaming magazine headlines.

[ilfsoy]

Yep, bdckr is right, several studies show this. However, there is a significant difference in the terms "most" and "nothing", saying zero managed funds outperform is false.

[bdckr]

Yep, bdckr is right, several studies show this. However, there is a significant difference in the terms "most" and "nothing", saying zero managed funds outperform is false.

Completely agree. See all previous posts. I'm always talking about and quoting the likelihood of beating the index. Probability, not absolute.

[astrolad]

I read a good article about the couch potato portfolio from Money Sense.
Bascially, the idea is to use a couple of index funds to easily out do mutual
funds and balance risk over the long term. Mind you, this is only based on
historical analysis.
The source of the investment strategy is Scott Burns, a writer for the DallasNews.
http://www.dallasnews.com/s/dws/bus/.../vitindex.html
(Requires login. Use bugmenot.com ).

[e0gdi]

I never said no fund couldn't. Every year there are probably lots of funds that outperform the index. But the point is that it is never the SAME fund doing it for like 20 years. If you look at the big picture, I don't believe there is ONE fund that has outperformed the index for a long time.(20+ years)

[joshmxpx]

a lot of you have stressed resp, but that's not really our objective. this would just be some money that we can save up for a long time, then use for something worthwhile, not necessarily education, as our kids will hopefully pay their own way. i had an resp growing up, and i know its a huge pain in the ass, especially when it comes time to withdraw the funds.

i'd rather have something that we can leave in for at least 25 years, after that we can pull it out anytime we deem necessary, whether we wait for retirement, or use it right away.

sounds like a lot of you recommend td efunds, so i might look into that for now.

thanks, and if you have any more suggestions, feel free to shout them out.

[advantage21]

In a perfect world, financial advisors will never steer you into an investment that is wrong for you. But in reality they have to make money too and only the naive will believe they will never push a mutual that will give them a better commission or churn a client's account. But I'm digressing....

There is enough research done to show that passive index funds consistently beats actively managed funds in the long run (20 years). I'll give the last word on this subject to Warren E. Buffett:

"By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb."

[advantage21]

thanks, and if you have any more suggestions, feel free to shout them out.

I highly recommend you to read Stocks for the Long Run by Jeremy Seigel. You can pick up copies for less than $20 in eBay.

[ilfsoy]

I never said no fund couldn't. Every year there are probably lots of funds that outperform the index. But the point is that it is never the SAME fund doing it for like 20 years. If you look at the big picture, I don't believe there is ONE fund that has outperformed the index for a long time.(20+ years)

There are a few funds out there that have, not very many have 20+ year track records though, 10-15 yr is more common. Looking at compounded returns since no particular investment or investment style will be in favour every year. One exception, widely publicized in the US business world, is Legg Mason Value Trust which has beaten the S&P 500 for fourteen straight years.

[Rehan]

One exception, widely publicized in the US business world, is Legg Mason Value Trust which has beaten the S&P 500 for fourteen straight years.

Thoughts on Indexing from that fund's manager:
http://www.bylo.org/leggmasn.html

[scottyb]

Another vote for index funds!

[Powderworker]

w00t! Another vote for index funds/eFunds....

Best way to invest regularly and dollar cost average with very low MERs, and no buying comissions.

Just do this: 25% CDN bond, 25% SP500, 25% Intl Index, 25% Canadian Index (TSX/SP).... sit back, invest monthly, and don't monitor things too closely. If the market takes a dive... use that as a buying chance.