Early Retirement Extreme Forums

I'm not sure why anyone would think the future will be like the past. The statement is in every prospectus for a reason. I guess I see investing as hedging, and assume active investments will fare better than passive, further assuming the entire system doesn't break down where everyone is toast.

Yes StockCharts' PerfCharts are total return.

@5ts My point is that we only have 2 years' worth of data which is not enough to see any major differences nor to expect any major differences. Furthermore I have never seen any evidence that a broad active fund (say >50 holdings and many billions of AUM) or even a basket of 50 randomly selected stocks (from a variety of sectors) would perform much different than their benchmark over such a short span of time.

Over the long term, other studies have made claims along the lines of "active beats passive over the long term before taxes and fees, but not so much after taxes and fees," or that equal weight would beat the market, or even randomly selected would beat the market (but again probably not so much after taxes and fees). However even if your active fund beats the market by 10 or 20 bps per year (honestly all you can realistically hope for but it still adds up over time), you're probably going to be highly correlated with a similar stock/bond mix of passive funds. You'll still be exposed to the same FIRE-killing risks of (a) retiring right before a major drawdown or (b) retiring in an extended high inflation / stagflation period like the late 60s / early 70s. I don't think buying and holding active vs. passive funds will help you much there, but on the other hand having a portfolio or trading strategy that's a lot different from the crowd could help - even if the underlying holdings are passive funds.

@Lucky C
Your point was and is clear, but my strategy is hoping there is some hedging advantage in active vs strictly passive investing. Active funds show no difference vs passive funds when looking in the past, but I don't see how we can extrapolate to the future. Your point about a contrarian position is understood, but that seems to open the door to more risk of investing strategy failure than the small chance of systemic failure. I think a catastrophe is possible, but unlikely, so I'm hoping to hedge a likely scenario. Regardless, these are all just my assumptions and intuitions, and I do not argue with your numbers. I just question the future of those numbers. Thanks for the discussion.

Totally agree. Though for active vs. passive luck can vary a lot. There are some managers that have had a significant streak of outperformance and some have always underperformed. I think, without doing a deep dive, that the research shows that active in aggregate does about the same as passive when you account for the turnover and fees - but you might get lucky with a good investment management team. Then again I would fear that if I choose a manager that has outperformed in the past, they will start underperforming in the future. Instead of learning how to be a good stock picker I feel like I'd have to learn to be a good manager picker - not sure which is harder, but everyone talks about how to pick good stocks, not managers.

I wonder if managers/funds have "momentum" in their alpha and you could be successful switching to funds every X amount of time based on their outperformance over the past year or so, and switch to others when the managers start to lose their edge. It would make sense that some managers would do well getting bargains during recessions and other managers would do well picking winners in a late bull market cycle, for example.

I also wonder if you could do well copying the top 10 or 20 Wellington holdings to avoid the fees (though Global Wellington is still only 0.46%). Top 10 Global Wellington stocks are >20% of its equities portion. Meb Faber's book Invest With the House shows good backtests by copying investors who regularly outperform the market, even when considering that there is a lag between their actual trades and when the trades become public knowledge.

Lucky C wrote: ↑

Sun Dec 22, 2019 6:12 pm

I wonder if managers/funds have "momentum" in their alpha and you could be successful switching to funds every X amount of time based on their outperformance over the past year or so, and switch to others when the managers start to lose their edge. It would make sense that some managers would do well getting bargains during recessions and other managers would do well picking winners in a late bull market cycle, for example.

For a while there was a fund-of-funs newsletter called FundX that did pretty well doing that. No idea if they still do well. Instead of performance chasing, their strategic goal was to lead the outperformance.

Lucky C wrote: ↑

Sun Dec 22, 2019 6:12 pm

I wonder if managers/funds have "momentum" in their alpha...

I think there is something to this, great point. I also think there would be a sufficient lag in both their outperforming and underperforming so you wouldn't lose all of the gains by getting in too late and missing the outperformance or getting out too late after waiting for the downturn. I have no evidence, just a hunch.

Lucky C wrote: ↑

Sun Dec 22, 2019 6:12 pm

I also wonder if you could do well copying the top 10 or 20 Wellington holdings to avoid the fees (though Global Wellington is still only 0.46%). Top 10 Global Wellington stocks are >20% of its equities portion.

Honestly, the 0.46% fee bugs me a little and that's very good for an active fund. Thank you, I think this is well worth examining, and I might do just that. If I don't actually implement it I will at least track the results of the strategy. If I do it I will post the results here or somewhere relevant in the forum at that time.

Since we are in such an extreme growth/momentum-chasing environment right now (especially in US) with value underperforming the last several years, it seems very likely that a Global Wellesley/Wellington or some other such active fund that focuses on value, quality, etc. should outperform something like a NASDAQ or S&P500 ETF from now through the next recession.

However we always have to hold the possibility that we're not as smart as we think we are the market doesn't behave like we think it should, so maybe a passive fund still has a few years of outperformance left to go vs. a more conservative active fund. Therefore it may make sense to do something like 75% active funds and 25% passive funds. Maybe in more "normal" times when valuations are average switch to 50% active and 50% passive. There are bound to be times in the future where your chosen active funds outperform and other times they underperform, so might as well diversify.

If you invest more like Jacob mostly picking individual safe stocks with decent dividends, maybe it makes sense to do 50% that and 50% active funds. After all you never know, there may be some surprise "war on dividends" in the future (depending on the conditions of some future downturn or some future tax law changes) and your income could go poof, whereas the active fund could be less reliant on dividends / more focused on total return.

How did Japanese dividends do in the last thirty years of sideways chop chop. That's gonna tell us a lot imo. I'd be wary of a dividend-based strategy going forward. The main issue in the us right now is corporate debt so once that starts and credit conditions tighten for everyone across the board, dividends would probably also suffer. I don't think you can use previous mkt crashes - at least not the tech bubble or 2008 - because neither of those was a corporate credit event. Idk what strategy I'd be comfortable with going forward, but it's not dividends. Looking forward to suggestions if anyone's got any.

@Lucky C
You nailed why I'm even looking at conservative, active funds. I am trying to prepare for a downturn relatively soon. This last decade in the market seems crazy and unsustainable, but who knows. I don't! The idea is the fund keeps up with the market now, roughly, and does better when it tanks, in theory. And I do have some passive stuff and probably always will, so just trying for some passive/active blend to weather the storms of the market because I can't do individual stocks, yet or possibly never. So I will probably always have some blend of active and passive strategies, just as you mentioned.

@ertyu
I don't have a clue but if I ever find something successful then I will share it, I think. I don't want to be responsible if it blows up and ruins someone's life though. We will cross that bridge if we ever come to it.