I don't.
That's normal as I am used to arguing with the stop sign.
It's quite common to come across "investors" who will pooh-pooh the use of actively managed mutual funds. They will usually mention these 2 strong and convincing arguments:
1) Low cost or no-load funds outperform funds with high management fees
Especially when compounded over the long term - like in 30 years. I can't argue with that!
But doesn't it look a lot like the Discounted Cash Flow (DCF) valuation method? There are "assumptions" and my favourite line - "all things being equal". If you have been investing for several years, when was the last time you encountered "all things being equal"?
By the way, if you are currently vested in passive index funds or ETFs, may I ask how long is your average holding period? How many "trades" have you done in a year? Especially if you are using the ETF vehicle.
Ahem, you may want to add the transaction costs into your calculations and maybe re-read the writings of John Bogle (father of index funds) from the Vanguard Group.
Quoting John Bogle and doing the opposite of what he advised is not exactly passive index investing...
2) 75% of active fund managers underperform the index
Can't argue with statistics (especially those not manipulated by yourself)!
To those strong advocates of passive index investing, again I ask you this question - do you stock-pick individual stocks on your own as in DIY?
I will pause here so you can listen to yourself better.
PAUSE (shhhh)
Can I assume you do so because your individual stock-picking track record has outperformed the index?
Or you fancy yourself to be amongst the 25% of fund managers that can and do outperform the index?
The reasons why I prefer actively managed funds
I stress this is for me and me alone. This post is merely to call out the Emperor's clothes.Not an attack on passive index investing; which definitely works for individuals with the right matching mindset and discipline.
I am not hyper-active, but for me to sit around, do nothing, and patiently wait 30 years is not exactly my definition of "fun". I'm in it for the money; but some fun along the way couldn't hurt right! Or?
a) Cognitive dissonance
In the words of the Godfather III - our ships must sail in the same directions. I do like the intellectual process (I made this up) of DIY investing. Of course this applies to the thrill of finding a fund manager (notice I never say fund) that can outperform his/her peers!
It will mess with my mind if my right hand says passive index investing good, while my left hand says DIY is the way to go! I'll go bananas!
Since I do a bit of swing trading on the side, the odds of finding these 25% top fund managers are a lot better than what they say of me making money by trading - only 10% of traders make money consistently.
Does that mean if I set aside some funds for outsourcing to fund managers, my odds of making money versus me trading on my own will improve by 2.5 to 1? How's that for statistical manipulation? LOL!
b) I don't mind paying for performance
Honestly, what's the difference between 0.3% versus 2% annual management fees if the fund manager can outperform the index by 5% and more?
Wait. Let me check my calculator... Yup! I still come out ahead!
The longest period I've held to a mutual fund is 5 years, and the average holding period is probably around 3 years.
I don't mind paying for performance, but I practice switching horses as and when needed. Once you don't perform, you're out! No wonder I am still single... I am such a cad!
I am more fearful good fund managers will not want my money - I am either too small in their eyes, or they have more than enough clients on their hands and close their funds on me :(
Mixed-up to conviction
In the end, what we say, what we do, and what we believe should ideally be aligned. At the very least, when we stumble and fall, we will know the reasons why. And can take the corrective actions.
For fellow veterans, I think we've all been through our early low conviction days. This month say long term investing is the way to go, only to switch to contra trading the next month, then join IPO staging, then switch to dividend investing, punting small caps to S-chips, and now singing Blue-chips are the best! Why? Business times say so what!
I am always laughing at myself ;)
Now I listen to myself more.
Singapore Man of Leisure (welcome to my blog; just google it!)
