# Indexing vs professional money management



## Rusty O'Toole (Feb 1, 2012)

Every investor should see this before deciding whether to invest their own money or trust a money manager.

http://www.visualcapitalist.com/myth-successful-money-manager/


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## 30seconds (Jan 11, 2014)

Thanks for that info. Can pass it on to a few people for sure.


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## Guban (Jul 5, 2011)

Is it just me, or does the graphic not display? I wonder why they took 1984 to 1998 as the reference dates. Odd for a current article.


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## Just a Guy (Mar 27, 2012)

Not that I'd defend the money managers, but I tend to hate misleading statistics more...

Let's say a money manager under performs the market by 0.1% for 9 out of 10 years, but outperforms it by 90% in one year...according to the "logic" presented in that article, investing in index funds would have been better because the "professional" underperformed 90% of the time...

It fails to mention real returns, not saying the results would be different (the year he outperformed, maybe the market only went up by $1), but it's a pretty biased way of presenting information...


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## bgc_fan (Apr 5, 2009)

Just a Guy said:


> Not that I'd defend the money managers, but I tend to hate misleading statistics more...
> 
> Let's say a money manager under performs the market by 0.1% for 9 out of 10 years, but outperforms it by 90% in one year...according to the "logic" presented in that article, investing in index funds would have been better because the "professional" underperformed 90% of the time...
> 
> It fails to mention real returns, not saying the results would be different (the year he outperformed, maybe the market only went up by $1), but it's a pretty biased way of presenting information...


The point about outperforming the market that one year is implying that you have to be really lucky to be invested with the manager for one year out of ten when he's underperforming for the rest of the nine years. If you see your fund underperforming for over 5 years straight, would you stick around for the hope of a miraculous 90% return? Besides, most of the underperformance is usually on the order of 2-4% annually depending on the MER.


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## Rusty O'Toole (Feb 1, 2012)

It's not so much about dissing money managers as learning what is possible or reasonable. If you prefer to employ a money manager, that is what you should do. But you should be thinking in terms of low cost or low fees, and investing in something stable. Please don't get sucked in by so called experts who promise 12% a year then end the year even or slightly lower. I have seen this happen to friends and relatives. Some kept hopping from one to another every year or two, always going with the one who promised the highest returns. Except of course, they never actually promise, you just think they do.

I know those who read this board know better. This graphic may be handy to show to friends and relatives who ask your opinion of the latest hot shot MM.


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## Rusty O'Toole (Feb 1, 2012)

I think the 1984 to 1998 statistic came from a study done in 1999 or 2000. Why they happened to chose a 15 year lookback I don't know.

It would be interesting to see one that was more up to date but not likely the industry will do one. For obvious reasons.


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## Rusty O'Toole (Feb 1, 2012)

There is a larger lesson. If the top money managers in the world, with degrees from the best universities and an IQ above 150, and a full time staff of geniuses equipped with the most powerful computers money can buy, if they can't beat the market what chance do we have?

It may be possible, but it might pay to think about just indexing, or buying dividend stocks, and letting it go at that.


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## indexxx (Oct 31, 2011)

Rusty O'Toole said:


> There is a larger lesson. If the top money managers in the world, with degrees from the best universities and an IQ above 150, and a full time staff of geniuses equipped with the most powerful computers money can buy, if they can't beat the market what chance do we have?
> 
> It may be possible, but it might pay to think about just indexing, or buying dividend stocks, and letting it go at that.


In a nutshell, that's exactly Dave Chilton's advice in The Wealthy Barber Returns.


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## Just a Guy (Mar 27, 2012)

One of the inherent problems with money managers is the fact that they feel they have to "do something". Even indexing people need to rebalance...

The idea of selling your winners just because they did well, doesn't make sense to me. Neither does "realizing profits" when the stocks are fine. 

But then, I'm not a professional...I just buy low and hold as long as nothing seems to have changed in the company.


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## LBCfan (Jan 13, 2011)

Well, maybe, depending on the company. Right now I'm torn between selling 1/2 of a small cap (PE ~7 when I bought it) that has doubled in the last 6 months. How can it be wrong to take any upside for free? But, could it go higher? Don't want to miss the upside. Silly me, konk.


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## Just a Guy (Mar 27, 2012)

If you sell half, the company has to go up,twice as much to make the same money...if you don't sell half, the company only has to go up half as high to make the same money...

Of course, that's assuming you spend the half you cashed out...you could have invested in something better, but then you need to realize the gain, and pay taxes on it, which decreases the amount you can reinvest, leaving it lets it grow tax deferred...and at this point my eye gloss over.

Of course, my crystal ball is still in the shop to boot, so I don't really know what's going to happen.


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## fraser (May 15, 2010)

I think that it very much depends on the advisor that you have and how that person is paid.

We used fee for service professional management with our bank. We were not pleased with the level of expertise or the service. We subsequently took almost nine months of shopping, talking to people, and meeting with the short list advisors to select someone. 

What surprised me was how many people were displeased but how few seemed to be making a change. 

It has been about three years now and we are very pleased with the service, the advice, and the resources that are available to us. And we are very pleased with the results. 

Bottom line....there are so many duds out there. Choose carefully and don't be lulled in by any of the 'slick sams' with lots of promises and a few meaningless credentials.


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## james4beach (Nov 15, 2012)

Rusty O'Toole said:


> There is a larger lesson. If the top money managers in the world, with degrees from the best universities and an IQ above 150, and a full time staff of geniuses equipped with the most powerful computers money can buy, *if they can't beat the market what chance do we have?*


No Rusty, haven't you been reading this forum? Everyone can pick dividend stocks with amazing performance. Anyone, five years ago, could have picked BCE & CNR and out-performed. (So easy).

Well at least that's what I often read here. Apparently, forum regulars are out-performing the TSX and all the best quants, hedge funds and value professionals in the world.

(That's sarcasm)


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## fraser (May 15, 2010)

We are not only concerned about returns. We are also concerned about the balance between returns and minimizing our downside.


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## Rusty O'Toole (Feb 1, 2012)

I do believe the little guy has certain advantages over the giants. Warren Buffett has touched on this. His heyday for performance was the fifties when he was managing between $150,000 and $15,000,000. He was buying small obscure companies like the New York Trap Rock Company, little auto parts producers in Detroit, and they would go up 50% in a year. You just can't do that when you swing a $100 billion line. You have to buy stocks like Coca Cola, Burlington railroad or buy smaller companies outright.

He has said he could make 50% a year if he was managing a million dollars.

But, in order to do that, you have to be dedicated to spending a lot of time on research. If you don't have the time, or talent, or inclination to do that indexing seems to be the way to go.


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## MoreMiles (Apr 20, 2011)

It's not just about returns. It's about getting the amount of money when you need it. Most self-directed investors get scared and have second thoughts on their nest eggs in a financial tsunami. Those with advisors have at least a second opinion to provide some directions. 

The markets are doing well now. So all the posts are about how not to waste money with advisor fees. Those who had a large sum invested during 2008 tsunami would remember the time where there were many posts asking what to do back then. They had no one to turn to so they come to internet for free average joe advice instead. 

I knew of a few retirees not wanting to go back to work and sold their stocks at that time and lost over $1 million. They have not caught the rebound because nobody knew what the future would bring. 

They are $1 million poorer even to this date. 

To me, 1% of fee is worth it.


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## Just a Guy (Mar 27, 2012)

fraser said:


> What surprised me was how many people were displeased but how few seemed to be making a change.


Why does this surprise you? This seems to be the story of humanity...

How many people complain about their job, their relationship, their financial situation, their returns, their life, their car their whatever...yet do nothing to try and change it.

How many people on this board attack someone for suggesting ways to change as being too difficult, impossible, liars, etc?

Even james4beach's comment right below yours is sarcastic about the performance of others because they "do it themselves". Personally, I don't know if an individual can routinely beat the market, I haven't studied it...but I know they have some advantages...heck, if they picked one lucky stock that goes ballistic for several years (let's say apple) they could do it simply by holding one stock (something no institution would do, and everyone here would decry as being stupid), but james automatically says they are probably lying...

There was that guy in Moneysense who bet his entire TFSA on some small cap and made millions...doing things no one would ever advise, but we decry him because what he did was risky...

Why do we say it's risky? Because that's what we've been taught to say by the institutions. It's not the *usual* way to do things, so we fear it.

Look at the attacks I get for real estate examples...Berubeland's the perfect example of closed mindedness here...says I'm lying all the time. I need to prove it to her, since she can't do it herself she thinks I'm lying...and she's not alone. When I pull up a real example, posters complain about "paying taxes on the profits", when they can't find anything else wrong with the example...

Face it, people want the safety and comfort of being miserable and complaining about it...humanity can't handle everything being good. The matrix movie was right about that.


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## My Own Advisor (Sep 24, 2012)

Agreed with Just A Guy.....money managers HAVE to trade to try and make money. They are paid to do so. This leads to under performance I believe.

By buying some blue-chip stocks or just indexing, you're going to avoid letting behaviour get in the way.

I'm no pro either, but buying some CDN dividend stocks at decent prices, DRIPping them and holding them through thick and thin has worked out nicely so far in my portfolio. I just need to do this for another 15 years then I can hopefully leave the workforce far behind.


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## OptsyEagle (Nov 29, 2009)

fraser said:


> We are not only concerned about returns. We are also concerned about the balance between returns and minimizing our downside.


Fraser, except for a few exceptions, just about everybody is concerned with what you said. They may not do the necessary steps to accomplish it, but that is probably their objective.

I do hope you understand that the 3 years of success you have had, has also coincided with 3 years of successful stock and bond markets. In that type of market, just about everyone can look like a rocket scientist, when it comes to investing.

It is the bear markets that brings out the ugly truth. That we are all human after all, including our advisors. We have no insight into the future, but mere guesses at best. Even if we are right about our guesses, unless they are different then everyone else's, being right will provide very little value. We are ALL greedy and fearful, again,because we are human.


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## bayview (Nov 6, 2011)

Money managers, especially those that manage mutual funds, have a short term outlook because of industry and peers pressure as some of you have rightly pointed out. Although they preached investing over a long term horizon so that clients will stay put, they act short term which include momentum trading and herd instinct to stay ahead even though in their presentation to you (clients) they will wow and dazzle you with their unique investment philosophies.

Mutual Fund managers are like soccer managers in the UK Premier League. There if the team is near relegation zone after 3-4 months, the manager is most likely gonna get the sack. Only private clients or high net worth clients can get customized portfolio management services. Here we are talking about absolute not relative return expectations. Still many of these private client type of portfolios are constructed by way of feeding into a range of mutual funds.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> One of the inherent problems with money managers is the fact that they feel they have to "do something".
> Even indexing people need to rebalance...


I'm not sure I'd call it a "feeling" ... where the marketing department sold investors on the fund's methods so that there's a large inflow of cash - I'm pretty sure that unless the fund philosophy allows for it, telling the investor "it's in cash as there's no bargains at the moment" isn't going to fly. 


As for index funds - anytime the index authority changes the index, there's going to be changes required.




Just a Guy said:


> The idea of selling your winners just because they did well, doesn't make sense to me. Neither does "realizing profits" when the stocks are fine.
> ...I just buy low and hold as long as nothing seems to have changed in the company...


Where one knows everything is fine ... sure.

Trouble is ... where the market itself is tanking significantly (think late 2008 and early 2009) - does it make sense to keep something that's up 500% versus selling some/all and then hoping to re-buy later? Sometimes - the company prospects don't matter compared to what is happening.


Cheers


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## brad (May 22, 2009)

Just a Guy said:


> There was that guy in Moneysense who bet his entire TFSA on some small cap and made millions...doing things no one would ever advise, but we decry him because what he did was risky...
> 
> Why do we say it's risky? Because that's what we've been taught to say by the institutions. It's not the *usual* way to do things, so we fear it.


No that's not why we say it's risky. It's risky because the probability of success with a gamble like that is so low.

The probability is obviously not zero and the potential payoff is huge, which is what makes people take those kinds of risks: they focus on the possibilities, not the probabilities. They don't use evidence-based estimates of likelihood: instead they look at outliers and anecdoes and exceptions to the rule, which all show them what is possible. 

The problem with anecdotes and outliers is that there's no probability associated with them. Sure, Warren Buffet exists, and there are likely thousands of other investors who've managed to beat the market for years or decades at a time. But you have to place those success into the context of the entire universe of investors. If there are millions of investors who have failed using the same approach, that says something about the probability of success. If your probability of success is low and you're gambling your entire TFSA, one could say it's "risky."

I really think it's a difference in mind-set. Some people focus on evidence and probability to guide their investment strategy. To people who focus on possibility, evidence-based investing seems like settling for mediocrity and "average" returns, when much higher returns are possible.


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## Just a Guy (Mar 27, 2012)

Elclectic, 

True, but a good company is likely to recover quickly...

If you cash out and spend the money on useless stuff like coffee, it kills all future potential earning power. I'm not saying never cash out and spend the money, I'm just saying selling winners is a weird idea to me. I've held through 2007/8/9, in fact I added to my holdings, and did quite well on the stuff I held and the stuff I bought.

Personally, I don't trade enough to trust finding something else if I cahsed out to pick a different company, but that's just me and my strategy...never claimed it was the best, but I'm not one of the ones complaining about my returns either.


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## Just a Guy (Mar 27, 2012)

brad said:


> No that's not why we say it's risky. It's risky because the probability of success with a gamble like that is so low.


Thanks for proving my point.

You've got no clue as to the research the guy did, yet you assume he gambled. It's not something you would do, and if you did, you figure it would be just a random guess...

The guy could have poured over financials and corporate information for months and found something that told him this was a good investment...just like the "experts" supposedly do with the large cap stocks (which you seem to believe is safe...as long as you don't count things like Nortel, Worldcom, Enron...). 

Instead, you feel better writing him off as a lucky guess...

Btw, I'm not saying it wasn't a lucky guess, or that I don't agree that it's not risky personally...but that doesn't mean I'm not wrong. 

There could be hundreds, maybe even thousands of people (a statistically meaningless number) who are making a consistent killing in small caps, or some other non-traditional investing method, who are ignored because others say it can't be done. They are probably laughing all the way to the bank while the majority pay "experts" to professionally lose them money, or indexers brag about single digit returns...


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## brad (May 22, 2009)

Just a Guy said:


> Instead, you feel better writing him off as a lucky guess...


No, not at all: it's just that there's not much evidence to say that more research lead to better investment choices. If it did, the professional fund managers (whom one would hope are doing lots of research) would be beating the index most of the time instead of about 30% of the time.

Nobody's saying "it can't be done." It obviously can. It's just that the probability of succeeding is low. It's possible to go out right now and buy a winning lottery ticket. Everyone knows that. But not everyone buys lottery tickets because the probability of winning is so microscopically low. That's not to equate diligently research stock picks with buying a lottery ticket. Clearly people who do research and choose companies carefully have a somewhat higher probability of picking winners than you would by picking stocks randomly. But if only a small portion of those people beat the market, it means the probability of success is still pretty low.


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## Just a Guy (Mar 27, 2012)

We probably have no idea how many people do this, and they probably keep their mouths shut. I know a lot of very wealthy people who you'd never guess are if you met them...irronically, most of the people I know who look wealthy and successful, usually aren't very (since it costs a lot to look that way,mother often have a lot of debt). 

Look at this forum. I talk about how I buy rentals, finance them 100% not using any "questionable means", can set them up where they generate cash flow and even have them professionally managed, but still people bite my head off for suggesting it.

I'm not alone in doing this, I know several guys who do it, there is even a couple of books I know which outline a similar method. There are people on this board who also do it.

Why would others bother to keep trying to tell people it can be done, when their are people like Berubeland out there (take a look at most of her postings about me), if I wasn't more thick skinned than most (or just a glutton for punishment) I'd probably have shut up long ago...instead, I just choose to ignore the ignorance. 

I could go on, quietly collecting money every month, while people spout off the "real estate is risky" lines...or I could try and reach those 1 or 2 people who see beyond the spew. I learned I liked that feeling when I was a part time teacher. I like getting that PM from somebody who's found an affordable rental which generates them money. It makes up for a world filled with people "who know better" and are content to work for paycheques or people like me.

Of course, I completely understand why others keep quiet about it...

The inquisition hasn't gone away...it's just changed from being exclusively about religion, and anyone can be an inquisitir.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> ... True, but a good company is likely to recover quickly...


+1 ....




Just a Guy said:


> ... If you cash out and spend the money on useless stuff like coffee, it kills all future potential earning power. I'm not saying never cash out and spend the money, I'm just saying selling winners is a weird idea to me.


I did say "sell ... hoping to re-buy" so the money would go into something liquid as opposed to withdrawing and spending it.
It certainly doesn't hurt future potential earning power to skip one or two dividends by selling and then re-buy at half the price.

IAC, if this was a money manager - should the investor cash out some units, the manager will have no choice. If it's the manager selling, I'm not sure how many useless things that can be spent on that won't be increasing the MER.





Just a Guy said:


> ... Personally, I don't trade enough to trust finding something else if I cahsed out to pick a different company, but that's just me and my strategy...never claimed it was the best, but I'm not one of the ones complaining about my returns either.


The triggers to sell that I'm talking about are market driven or company driven ... so unless there's a major immediate concern - I'm not sure why one would sell without having an alternative picked. In the case of a broad market selloff, the replacement can be the same company sold (assuming little has changed for the company prospects).


Cheers


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## none (Jan 15, 2013)

I think Brad nailed it.


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## Just a Guy (Mar 27, 2012)

Electic, 

Each time you sell you trigger trade costs, capital gains, etc. all which eat into earning power.

Let's say toy bought company A, and it doubles in value so you cash out half and buy company B. After tax, you have less than 75% of the cash out left to buy company B (25% capital gains, trading fees, etc). Had you not cashed out, company A can underperformed company B by 25% and still earn you the same money because you deffered the taxes. As I outline:

Company A worth $200

Sell half scenario
Company A $100
Company B $75

Company A triples to $300
Company B has to quadruple to make $300

Had you not sold, company A, would have made you $600, so company B has to really outperform A to make it worthwhile. At these low values, a $10 trading fee can really hurt, even trading in the $1000's it has an impact. 

Rapid trades (trading fees) and tax realization can really hurt people in the long run.


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## Jorob199r (Sep 4, 2014)

All money managers aren't bad, I invest heavily in Mawer mutual funds and have been extremely happy with their performance.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> ... Each time you sell you trigger trade costs, capital gains, etc. all which eat into earning power ...
> Rapid trades (trading fees) and tax realization can really hurt people in the long run.


In a taxable account ... absolutely. In a registered account, the main reduction would be the trading fee, with either deferred or exempt capital gains.

IAC - the "low values" is part of the picture ... by my calculations, despite the capital gains tax reducing the available proceeds, with the 500% growth plus re-buying the same company towards the low end - the new shares pretty much grew as much as the old shares. By my calculations, instead of 100 shares that recovered while continuing to receive dividends - the sale meant losing two dividends in exchange for ending up with 140 shares, paying dividends/growing at the same rate for the future.


Cheers


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