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  • FIRST POST
    • sixpence.
    • By sixpence. 4th Jan 18, 7:28 PM
    • 55Posts
    • 14Thanks
    sixpence.
    Index vs managed funds the great war
    • #1
    • 4th Jan 18, 7:28 PM
    Index vs managed funds the great war 4th Jan 18 at 7:28 PM
    Hello hello

    I have been researching index funds versus managed funds, as an investing newbie. There seems to be general war between investors who believe that one is better than the other. I am in the process of rebalancing my portfolio (will be approx 24k in total in an ISA).

    I am thinking of favouring index sums but adding in some managed funds for the wow factor: 88% in mixed Index funds [70% Vanguard 60, 10% Asia pacific ex Japan, 8% global tech] and 12% in "rouge" managed funds [3% Emerging Markets, 3% UK small businesses, 3% UK growth 3% China]

    Do people on here have an opinion either way on which is better? Currently reading John C. Bogle's The Little Book of Common Sense Investing which is all about how much better index funds are.

    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Last edited by sixpence.; 04-01-2018 at 7:32 PM.
Page 1
    • ColdIron
    • By ColdIron 4th Jan 18, 7:49 PM
    • 3,727 Posts
    • 4,552 Thanks
    ColdIron
    • #2
    • 4th Jan 18, 7:49 PM
    • #2
    • 4th Jan 18, 7:49 PM
    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Originally posted by sixpence.
    You need to read some other books
    • fun4everyone
    • By fun4everyone 4th Jan 18, 7:55 PM
    • 853 Posts
    • 1,399 Thanks
    fun4everyone
    • #3
    • 4th Jan 18, 7:55 PM
    • #3
    • 4th Jan 18, 7:55 PM
    There should not be a war, despite it being a repeated argument. Both have their uses.

    The real truth is that active funds are better in some areas and passive funds are better in others. Build your portfolio accordingly and use actives to give the direction you want where managers can add performance. Use passives in sectors where they are the better option.
    • ivormonee
    • By ivormonee 4th Jan 18, 8:23 PM
    • 107 Posts
    • 80 Thanks
    ivormonee
    • #4
    • 4th Jan 18, 8:23 PM
    • #4
    • 4th Jan 18, 8:23 PM
    The jury's out on this one, and has been for a number of years. There's compelling evidence that is claimed by both sides and I'm not sure which to believe or which is the most credible; both put forward valid arguments, and you've already discovered some on the side of passives from the book you mentioned.
    • OldMusicGuy
    • By OldMusicGuy 4th Jan 18, 8:53 PM
    • 248 Posts
    • 456 Thanks
    OldMusicGuy
    • #5
    • 4th Jan 18, 8:53 PM
    • #5
    • 4th Jan 18, 8:53 PM
    I have both passive and active funds in my portfolio. It's not an either/or situation. It depends what your investment objectives are. A lot of it also comes down to your own personal opinion.
    • Thrugelmir
    • By Thrugelmir 4th Jan 18, 9:07 PM
    • 56,659 Posts
    • 50,044 Thanks
    Thrugelmir
    • #6
    • 4th Jan 18, 9:07 PM
    • #6
    • 4th Jan 18, 9:07 PM

    Do people on here have an opinion either way on which is better?
    Originally posted by sixpence.
    Neither. Both serve their purposes. Nor can managed funds cover all markets. For most investors a mix and match approach is best. Outside of the US markets. There's far more opportunity to exploit pricing anomalies as well.

    Also much depends on personal circumstances. In summary I have accrued an above basic state pension and have DB pensions in place (continuing to accrue further guaranteed benefits in one). With this sound base. I can afford to use my SIPP (which I also continue to contribute too) to adopt a higher risk profile.

    Closer to your age I was far more conservative in my investing stance. Only risk what you can afford to lose.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • sixpence.
    • By sixpence. 4th Jan 18, 10:11 PM
    • 55 Posts
    • 14 Thanks
    sixpence.
    • #7
    • 4th Jan 18, 10:11 PM
    • #7
    • 4th Jan 18, 10:11 PM
    Closer to your age I was far more conservative in my investing stance. Only risk what you can afford to lose.
    Originally posted by Thrugelmir
    Would be interested to know what approach you adopted and why, if you feel like sharing it.

    The real truth is that active funds are better in some areas and passive funds are better in others. Build your portfolio accordingly and use actives to give the direction you want where managers can add performance. Use passives in sectors where they are the better option.
    Originally posted by fun4everyone
    Is there a way of researching which sectors are better for index funds? I can see how for a more stable economy like the US I would use an index fund, but for say China a managed fund might be best.

    You need to read some other books
    Originally posted by ColdIron
    Do you have any recommendations? So far have been doing online research/bought a few books and checking out YouTube as well. If you have any suggestions that would be appreciated. I have already had a look at the previous book thread on here, so no need to flag that up.
    • bostonerimus
    • By bostonerimus 5th Jan 18, 12:00 AM
    • 1,396 Posts
    • 815 Thanks
    bostonerimus
    • #8
    • 5th Jan 18, 12:00 AM
    • #8
    • 5th Jan 18, 12:00 AM
    My approach has been to use indexes and rebalance to a set asset allocation. That has netted me an annual average return of 8.5% for the last 30 years and 17% return in 2017. I look at the mathematics and it convinces me that you are far better to keep costs down with indexes and maximize the probability of success rather than use active funds in an effort to maximize return. You must remember that if you use indexes you'll always hear from the active investors that have beaten you, but never from those than have done worse.
    Misanthrope in search of similar for mutual loathing
    • BananaRepublic
    • By BananaRepublic 5th Jan 18, 12:08 AM
    • 1,040 Posts
    • 763 Thanks
    BananaRepublic
    • #9
    • 5th Jan 18, 12:08 AM
    • #9
    • 5th Jan 18, 12:08 AM
    You can of course do your own analysis, by looking at fund performance over the past ten years across a range of markets and sectors. There are plenty of online fund comparison tools available. I use You Invest’s being a customer but you can too. Then draw your own conclusions.

    I am always surprised that academic research appears to favour index funds, but that may be due to the way they analyse the data. My belief is that active funds need not be more volatile, and can markedly outperform the index. Most don’t of course.

    Note that many markets and sectors do not have index funds, so if you want exposure to them, active is the only choice.
    • ValiantSon
    • By ValiantSon 5th Jan 18, 12:47 AM
    • 158 Posts
    • 159 Thanks
    ValiantSon
    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Originally posted by sixpence.
    The policemen look like they haven't started shaving; I can't name you a single artist in the charts; I still buy CDs - and call them records; and tut about the youth of today. Now I have to add something else to the list of things that make me an "older" person.

    Sorry, not much help to you, but I feel so very old now. Best go and make a cup of cocoa and go to bed.... if my old bones will get me there.
    • TBC15
    • By TBC15 5th Jan 18, 2:36 AM
    • 318 Posts
    • 123 Thanks
    TBC15
    There is a small skirmish going on over here

    http://forums.moneysavingexpert.com/showthread.php?t=5719527

    That might interest you.
    • bostonerimus
    • By bostonerimus 5th Jan 18, 2:37 AM
    • 1,396 Posts
    • 815 Thanks
    bostonerimus
    My belief is that active funds need not be more volatile, and can markedly outperform the index. Most don’t of course.
    Originally posted by BananaRepublic
    That's my belief too....in fact the studies show exactly that. I would definitely be an active investor if I knew which funds would beat their indexes each year.
    Misanthrope in search of similar for mutual loathing
    • BananaRepublic
    • By BananaRepublic 5th Jan 18, 6:20 AM
    • 1,040 Posts
    • 763 Thanks
    BananaRepublic
    That's my belief too....in fact the studies show exactly that. I would definitely be an active investor if I knew which funds would beat their indexes each year.
    Originally posted by bostonerimus
    I have found that past performance is a pretty good guide to future performance in the UK, European and Japanese markets.
    • Fatbritabroad
    • By Fatbritabroad 5th Jan 18, 7:26 AM
    • 216 Posts
    • 106 Thanks
    Fatbritabroad
    I took the view, and don't pretend to know everything at all, that if you're investigating g for a 30 year period then index funds have a lower cost and over that kind of time frame while some active fund will undoubtedly best the market average most won't. And I'm not confident to pick which will be which. I figured if I wasn't going to try and buy my own shares directly the market average would be fine for me.

    I definitely think active funds have their place in some markets
    • firestone
    • By firestone 5th Jan 18, 9:40 AM
    • 107 Posts
    • 39 Thanks
    firestone
    The policemen look like they haven't started shaving; I can't name you a single artist in the charts; I still buy CDs - and call them records; and tut about the youth of today. Now I have to add something else to the list of things that make me an "older" person.

    Sorry, not much help to you, but I feel so very old now. Best go and make a cup of cocoa and go to bed.... if my old bones will get me there.
    Originally posted by ValiantSon
    Funny enough as i get older i have started to look at trackers more or even some of the smart beta ETF's as they also appeal on a time saving benefit.Back in the 70's when i turned 16 like many at that time i had an endowment policy from my parents payout what seemed like a good sum for a small monthly payment to the man from Liv & Vic(or Pru).This got me interested in saving and i heard about a monthly plan with F&C so started that.Over the years that and other active funds i joined did well (as best i could tell with less info in them days for DIY)And with some of the IT's i have i can see no reason to ditch and the likes of City of London,Scottish Mortgage,F&C & Witan etc are not even that expensive
    But what i have found and started with my company pension is that if my fund choice's started to do bad i have become more likely to pick a passive or add to the ones i had rather then do the work to find the next big thing only to see the original choice rebound and go past the new choice: (But i still look active for somethings such as bonds as i think a manager can add value.)
    What ever your age - if new to investing i would read up first as there is more info now then ever before or take up the offer of a first meeting with an IFA(may even be free) I would then make at least one active fund choice to give some interest and learning curve in investing as even going passive it would be good to understand markets,dividends,yield etc.As just doing set and forget with a passive investment can come with a shock if you don't understand.One of the good things for trackers is they have been around in pretty much stable times but have not faced a 70's recession or a long down turn so may come as a shock to some.
    So young or old no passive/active war but hopefully a mix of both
    • lpgm
    • By lpgm 5th Jan 18, 10:01 AM
    • 203 Posts
    • 99 Thanks
    lpgm
    EDIT: I am 28 years old and write this with the awareness that index funds are better suited to older investors as if diversified they are perceived to be lower in risk.
    Originally posted by sixpence.
    It's nothing to do with age. And remember risk isn't one thing. There are different risks. For example, the risk of losing everything, if you put your money in one stock. Or the risk of markets tanking the day you need to take money out (you mitigate this risk by having an emergency fund or cash cushion).

    It's not safe to think index funds are 'less risky' than active funds, although you can argue active investing introduces the extra risk of underperforming the index, if there is one.
    Last edited by lpgm; 05-01-2018 at 10:04 AM.
    • Linton
    • By Linton 5th Jan 18, 10:03 AM
    • 8,847 Posts
    • 8,879 Thanks
    Linton
    That's my belief too....in fact the studies show exactly that. I would definitely be an active investor if I knew which funds would beat their indexes each year.
    Originally posted by bostonerimus
    You dont need to know which funds will beat their indexes. You need a large enough portfolio to hold a non trivial amount in each of a broad range of funds. Some will beat their index and some wont. You can easily rule out any no-hopers and presumably have a better than average chance with the rest.

    Most actively managed funds wont match their index (should they have one) because they dont invest in their index. And those that do are the closet trackers which are pointless and can be ignored. Active funds not investing in their index is the fundamental reason one may wish to buy them. Asset allocation is far more important than the odd fraction of a % in charges - if one wants to invest in the index buy the index, otherwise otherwise.
    • AlanP
    • By AlanP 5th Jan 18, 10:20 AM
    • 1,044 Posts
    • 746 Thanks
    AlanP
    Remember John Bogle is American and is writing for a US audience.

    The tax treatment by the IRS of each internal sale by a US domiciled fund is different to the way in which a UK domiciled fund is treated by HMRC which makes "trading" costly hence a reasonably static Tracker fund / ETF has an advantage.

    I have both Active & Passive funds and try to avoid being dogmatic as they both have a role and a function that works in different markets and different situations.

    The great advantage of a Tracker is it is so easy, and is less daunting for those starting out in investing. Analysing and comparing active funds needs more effort if it is to be done well, it also needs to be more closely monitored over time.

    With a diversified set of trackers you could just Fire & Forget for 10/20/30 years and you woudl have achieved whatever that market achieved (less costs).
    • ColdIron
    • By ColdIron 5th Jan 18, 11:16 AM
    • 3,727 Posts
    • 4,552 Thanks
    ColdIron
    Do you have any recommendations? So far have been doing online research/bought a few books and checking out YouTube as well. If you have any suggestions that would be appreciated. I have already had a look at the previous book thread on here, so no need to flag that up.
    Originally posted by sixpence.
    There are some good recommendations there and I struggle to see how, having read them, that you can conclude that passives are better suited to older investors. I am pretty confident that none of them have actually stated that. How do you explain your decision, as a younger person, to use them yourself? Anyway my day won't be improved by another pointless active/passive, salt/pepper bun fight so I'm out
    • ivormonee
    • By ivormonee 5th Jan 18, 11:37 AM
    • 107 Posts
    • 80 Thanks
    ivormonee
    Note that many markets and sectors do not have index funds, so if you want exposure to them, active is the only choice.
    Originally posted by BananaRepublic
    Which sectors and markets don't have index funds?
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