Vanguard investing options in market downturn

Thrugelmir

BananaRepublic said:

I suspect an awful lot of active funds are created to be sold using glossy marketing nonsense, in the full knowledge that performance may be mediocre to poor. In other words, they are no more than a cynical vehicle to earn fund management commission. 

Apply the same logic to many ETF's today.  Bundle a number of shares together that fit a certain criteria (in particular ESG related) with a fancy title. Retail investors lap them up. No idea what's actually under the bonnet. Whether they are paying a fair price for individual stocks concerned. As further buyers of the ETF simply reinforce the over performance. In a way creating a mini bubble. Meanwhile a whole tranche of unloved but perfectly decent trading companies, are shunned for no reason.  Which most likely explains the increase in active fund management recently. There's opportunities to be exploited and money to be made. No one is looking at a 40 year time horizon either.  

JohnWinder

Indeed. But let's remember that the F in ETF stands for fund not passive fund. No one says it has to be index tracking; they can be as actively managed as any other fund, or is there a local regulation against that in some jurisdictions?

Paying a fair price for the underlying stocks? People should expect to be if the fund has independent market makers with permission to create and 'un-create' the ETF units. There ought to be regulations requiring that, but if not avoid ETF's without decent authorised participants. So you can't create a mini bubble since the gas in it is dissipated across the whole market.

Unloved companies shunned by the masses will quickly be identified by the astute investors and gobbled up thus raising their price to appropriate levels.

I'm anticipating investing for another 40 years, with some bequest intentions beyond, so that's certainly my horizon.

Thrugelmir

JohnWinder said:

Paying a fair price for the underlying stocks? 

Isn't that a fundamental principle when choosing investments. Appreciate it's rather an old fashioned concept that seems to have fallen by the wayside. 

Prism

Thrugelmir said:

JohnWinder said:

Paying a fair price for the underlying stocks? 

Isn't that a fundamental principle when choosing investments. Appreciate it's rather an old fashioned concept that seems to have fallen by the wayside. 

More of an art than science with growth stocks since it is based on an unknown future. One persons expensive is another persons cheap. The guys at Baillie Gifford still think Tesla is pretty cheap.

Thrugelmir

Prism said:

Thrugelmir said:

JohnWinder said:

Paying a fair price for the underlying stocks? 

Isn't that a fundamental principle when choosing investments. Appreciate it's rather an old fashioned concept that seems to have fallen by the wayside. 

More of an art than science with growth stocks since it is based on an unknown future. One persons expensive is another persons cheap. The guys at Baillie Gifford still think Tesla is pretty cheap.

My comment was in regards to ETF's which in the main aren't actively managed. There main attraction being the very low management cost. Retail investors will often have no view on the underlying stocks. Certainly won't be up to date with company specific events. As I said earlier the attraction will be the theme and more than likely recent coverage / performance. Herd behaviour is well documented. Not a new phenomenon by any means. 

BG trimmed their exposure to Tesla several times during 2020 because of concentration risk. With an ETF there's no trimming.  You ride the waves.  

Michael121

Not sure how you would do the math on picking funds but if you put £10k in 3 funds and assumed you could pick 1 of 2 active funds that beats the benchmark so 50% of the time you would get this result?

£100K in a passive fund and it returned 7% over 10 years
vs
£50k in an active fund returning 8% over 10 years
£50k in an active fund returning 6% over 10 years

Result would be you break even minus the transactional cost of buying multiple funds that you wouldn't have the problem with buying one tracker?

So if you was to get the 8% returning fund 90% of the time now you beat the passive fund but what if 5% of the time you lose all your initial investment. That's 10 years of 50k not collecting 7% of the years after plus the 7% you lost in the first 10yrs. Its a little hard to work with because i have no idea what the gains could be but as we don't live for ever busting your initial investment could cost you a lot of money in the long run.

If you could trial it over 100s of times it probably would even out assuming you were right 50% of the time but in our short time investing we could only do this what 3 to 4 times over a 30 to 40 year time investing. Unless you want to keep selling and buying new funds on a yearly basis you could stretch it to 30-40 trials.

Not sure on my math, sure some math whizz could do a better job.

Prism

Michael121 said:

Not sure how you would do the math on picking funds but if you put £10k in 3 funds and assumed you could pick 1 of 2 active funds that beats the benchmark so 50% of the time you would get this result?

£100K in a passive fund and it returned 7% over 10 years
vs
£50k in an active fund returning 8% over 10 years
£50k in an active fund returning 6% over 10 years

Result would be you break even minus the transactional cost of buying multiple funds that you wouldn't have the problem with buying one tracker?

So if you was to get the 8% returning fund 90% of the time now you beat the passive fund but what if 5% of the time you lose all your initial investment. That's 10 years of 50k not collecting 7% of the years after plus the 7% you lost in the first 10yrs. Its a little hard to work with because i have no idea what the gains could be but as we don't live for ever busting your initial investment could cost you a lot of money in the long run.

If you could trial it over 100s of times it probably would even out assuming you were right 50% of the time but in our short time investing we could only do this what 3 to 4 times over a 30 to 40 year time investing. Unless you want to keep selling and buying new funds on a yearly basis you could stretch it to 30-40 trials.

Not sure on my math, sure some math whizz could do a better job.

I am not sure that you could apply statistics to the question because its hard to say what the chance is that someone picks 5 funds that all beat their index assuming those funds were not selected randomly. As an example my success rate of picking active funds is around 90% over the last 8 years or so.

That doesn't tell the whole story as the 10% of underperformers might have been a huge chunk of my allocation or might have under performed by a lot.

Thrugelmir

Michael121 said:

Not sure how you would do the math on picking funds but if you put £10k in 3 funds and assumed you could pick 1 of 2 active funds that beats the benchmark so 50% of the time you would get this result?

£100K in a passive fund and it returned 7% over 10 years
vs
£50k in an active fund returning 8% over 10 years
£50k in an active fund returning 6% over 10 years

Result would be you break even minus the transactional cost of buying multiple funds that you wouldn't have the problem with buying one tracker?

So if you was to get the 8% returning fund 90% of the time now you beat the passive fund but what if 5% of the time you lose all your initial investment. That's 10 years of 50k not collecting 7% of the years after plus the 7% you lost in the first 10yrs. Its a little hard to work with because i have no idea what the gains could be but as we don't live for ever busting your initial investment could cost you a lot of money in the long run.

If you could trial it over 100s of times it probably would even out assuming you were right 50% of the time but in our short time investing we could only do this what 3 to 4 times over a 30 to 40 year time investing. Unless you want to keep selling and buying new funds on a yearly basis you could stretch it to 30-40 trials.

Not sure on my math, sure some math whizz could do a better job.

Using your own investment strategy can you obtain a return that's greater than the long term historic averages of 4%-5% after inflation and before fees. Across your entire portfolio that is, not a singular fund.  The mix of active and passive doesn't matter. It's picking the right markets, the right sectors etc, that will determine the outcome.  Likewise when to take profits, cut ones losses. Simply adopting a buy, hold and forget strategy for 10 years is unlikely to produce optimum returns whatever the investment. As nothing every stands still. 

All investors make mistakes, errors of judgement. As @Prism says.  10% fail to deliver but 90% exceed. That's all that matters when it comes to the bottom line. Overall profit made.  

BananaRepublic

JohnWinder said:

Unloved companies shunned by the masses will quickly be identified by the astute investors and gobbled up thus raising their price to appropriate levels.

I'm anticipating investing for another 40 years, with some bequest intentions beyond, so that's certainly my horizon.

It sounds like you accept the efficient market hypothesis. Many years ago I read some research that suggested that the EMH applied well in the US, consistent with trackers being the wise choice, but less well in other markets such as Japan. Since then more research has been done. I can’t remember the explanation but I think it’s because there is so much information available and so many financial companies in the US that it’s hard for a company to hide. There’s plenty of research that suggests the EMH does not apply well in Europe and Japan. It’s also possible it does not apply to small companies as well because there are so many, hence there is too much information available. 

Some fund managers have staff who visit companies and talk to their directors to get a better idea of their future. Pension funds and private investors don’t normally do that. I suspect many funds don’t do that ie the marketing shells that are commission vehicles. 

BananaRepublic

Thrugelmir said:
The mix of active and passive doesn't matter. It's picking the right markets, the right sectors etc, that will determine the outcome.  Likewise when to take profits, cut ones losses. Simply adopting a buy, hold and forget strategy for 10 years is unlikely to produce optimum returns whatever the investment. As nothing every stands still. 

All investors make mistakes, errors of judgement. As @Prism says.  10% fail to deliver but 90% exceed. That's all that matters when it comes to the bottom line. Overall profit made.  

Yup, first pick the right geographical areas, the right investment style eg growth, the right market segment eg small and mid caps, then select funds. Sometimes there are no index funds. I do think you have to be careful picking active funds, there’s a lot of dogs.