07-17-2021, 11:47 PM
Beating the market...what Bogleheads have wrong
<!-- SC_OFF --><div class="md"><p>The core tenet of Boglehead philosophy is to buy and hold passive mutual funds, and you’ll get rich slowly. Of course this assumes the market in aggregate will keep going up. Bogleheads consider it as fact: of course it will go up over 10+ years, certainly over 20+ years. For as much as this community love Vanguard ETFs they sure like to ignore this line in their prospectus: “Past performance is no guarantee of future results.”</p> <p>Okay...so maybe we all have to HOPE that markets will go up over a 20 year time frame otherwise we all are going to have a hard time. But how hard is it to beat the market?</p> <p>Turns out fewer than 5% of mutual funds can outperform the S&P 500 over 10 years. There’s lots of stats on this, but not much into the “why”. No, the story you heard that a monkey flipping a coin is better than your Ivy league educated asset manager is untrue. The truth is uglier. The industry is <strong>RIGGED</strong> against continued out-performance of good managers. Let’s see the reasons why:</p> <ul> <li>Managers are rarely rewarded for sticking it out on undervalued companies that won’t catalyze earnings for several years. This doesn’t help their end-of-year bonus, and it can cost them their jobs. The one-year performance target is like an anchor around their neck.</li> <li>Successful funds become victim of their own success. Funds that have grown too large cannot easily unload their positions, especially if they end up owning a substantial % of small crowded holdings.</li> <li>Dirty secret of the fund industry: many managers are so scared of under-performing their benchmark that that they’ll hold certain momentum stocks at weight and seek their alpha else-where. Look at Vanguard Primecap Fund (pretty much Vanguard’s star growth active fund). Pay attention and you’ll notice they hold ~2% of their AUM in Tesla, nearly always tracking the same amount held in their benchmark Growth index. I can’t speak for that manager directly but many managers FEAR that not holding Tesla (or whatever momentum story of the day) at index-weight may impact their end-of-year comp. This leads into the next point…</li> <li>Inflows and outflows then come at the worst possible times, forcing managers to buy into their style index when it’s most expensive & sell cheap. This makes it nearly impossible to beat the style-neutral S&P 500 consistently.</li> <li>Fees! (okay – Bogleheads win on this one)</li> </ul> <p>Can we all agree that 99% of people on reddit do not have the problems above? We can invest for 10+ year time-frames if we have the patience. If we’re in an IRA we can literally dump 100% of our holdings and start-anew with different holdings. We aren't beholden to a benchmark.</p> <p>Maybe VTI is where to be for the next 20 years. Maybe Apple will continue it’s march to 50 PE. Neither would surprise me. The US Stock Market has moved away from being a vehicle to help companies raise capital and instead has turned into a too-big-to-fail pension fund for the US population.</p> <p>I'm at the point now though where I’m no longer willing to bet that markets only go up. If you're in the same boat, you either have to learn how to navigate markets or you need to find a good benchmark free manager (good luck).</p> <p>Tactical stock picks & macro will be my guiding torches going forward.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/cr0ne"> /u/cr0ne </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/olvvz1/beating_the_marketwhat_bogleheads_have_wrong/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/olvvz1/beating_the_marketwhat_bogleheads_have_wrong/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>The core tenet of Boglehead philosophy is to buy and hold passive mutual funds, and you’ll get rich slowly. Of course this assumes the market in aggregate will keep going up. Bogleheads consider it as fact: of course it will go up over 10+ years, certainly over 20+ years. For as much as this community love Vanguard ETFs they sure like to ignore this line in their prospectus: “Past performance is no guarantee of future results.”</p> <p>Okay...so maybe we all have to HOPE that markets will go up over a 20 year time frame otherwise we all are going to have a hard time. But how hard is it to beat the market?</p> <p>Turns out fewer than 5% of mutual funds can outperform the S&P 500 over 10 years. There’s lots of stats on this, but not much into the “why”. No, the story you heard that a monkey flipping a coin is better than your Ivy league educated asset manager is untrue. The truth is uglier. The industry is <strong>RIGGED</strong> against continued out-performance of good managers. Let’s see the reasons why:</p> <ul> <li>Managers are rarely rewarded for sticking it out on undervalued companies that won’t catalyze earnings for several years. This doesn’t help their end-of-year bonus, and it can cost them their jobs. The one-year performance target is like an anchor around their neck.</li> <li>Successful funds become victim of their own success. Funds that have grown too large cannot easily unload their positions, especially if they end up owning a substantial % of small crowded holdings.</li> <li>Dirty secret of the fund industry: many managers are so scared of under-performing their benchmark that that they’ll hold certain momentum stocks at weight and seek their alpha else-where. Look at Vanguard Primecap Fund (pretty much Vanguard’s star growth active fund). Pay attention and you’ll notice they hold ~2% of their AUM in Tesla, nearly always tracking the same amount held in their benchmark Growth index. I can’t speak for that manager directly but many managers FEAR that not holding Tesla (or whatever momentum story of the day) at index-weight may impact their end-of-year comp. This leads into the next point…</li> <li>Inflows and outflows then come at the worst possible times, forcing managers to buy into their style index when it’s most expensive & sell cheap. This makes it nearly impossible to beat the style-neutral S&P 500 consistently.</li> <li>Fees! (okay – Bogleheads win on this one)</li> </ul> <p>Can we all agree that 99% of people on reddit do not have the problems above? We can invest for 10+ year time-frames if we have the patience. If we’re in an IRA we can literally dump 100% of our holdings and start-anew with different holdings. We aren't beholden to a benchmark.</p> <p>Maybe VTI is where to be for the next 20 years. Maybe Apple will continue it’s march to 50 PE. Neither would surprise me. The US Stock Market has moved away from being a vehicle to help companies raise capital and instead has turned into a too-big-to-fail pension fund for the US population.</p> <p>I'm at the point now though where I’m no longer willing to bet that markets only go up. If you're in the same boat, you either have to learn how to navigate markets or you need to find a good benchmark free manager (good luck).</p> <p>Tactical stock picks & macro will be my guiding torches going forward.</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/cr0ne"> /u/cr0ne </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/olvvz1/beating_the_marketwhat_bogleheads_have_wrong/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/olvvz1/beating_the_marketwhat_bogleheads_have_wrong/">[comments]</a></span>Kind Regards R