Comments on: The Media Needs Actively Managed Funds

By: Dividend Growth Investor

Dividend Growth Investor — Sat, 14 Mar 2009 14:26:10 +0000

That’s a good article on mutual funds. I do disagree however that one needs a lot of money in order to be diversified. With the advent of online trading whose costs are rapidly declining, investors managing individual stocks are on par with mutual fund managers.

I do agree however that beating the S&P 500 is next to impossible.

By: ObliviousInvestor

ObliviousInvestor — Wed, 11 Mar 2009 00:33:56 +0000

Yes, over the short-term, markets move as a function of supply and demand. People get scared, demand goes down, and prices go down. People become confident, and prices go up.

But over the long-term, equity market returns have more to do with corporate earnings than with supply and demand.

In fact, an increased demand for equities actually leads to lower long-term returns for investors. (Greater demand for investments means higher prices. The more you pay for an investment, the lower the rate of return. That’s just simple math.)

By: MoneyNing

MoneyNing — Wed, 11 Mar 2009 00:18:20 +0000

Ari: While I agree that the market moves because people buy or sell securities, I don’t necessarily get how the stock prices move either. For example, if EVERYONE just sticks with index funds, you will see that people sell stocks when they need money and buy whenever they have money (for those interested in equities anyway). As the money supply in the market always increases, so will the stock market.

However, I do credit the actively managed funds for helping increase advertising on the equity market as a whole though. Without these, (and CNBC for that matter), I bet many people wouldn’t even participate and therefore the securities in general wouldn’t have a high value due to less demand.

By: ObliviousInvestor

ObliviousInvestor — Tue, 10 Mar 2009 22:48:03 +0000

Ari, of course actively managed funds can offer a return better than index funds, if you’re able to choose the right ones a the right times.

Explain to me, though, why index funds need actively managed funds and individual stock pickers? Long-term market returns don’t come as the result of people executing trades. They come as the result of corporate dividends and earnings growth.

Am I missing something?

By: Ari Weinberg

Ari Weinberg — Tue, 10 Mar 2009 22:39:15 +0000

As a member of the financial media, I don’t necessarily agree with this thesis. Index funds NEED actively managed funds or any stockpickers in the market. The market moves when people have opinions on individual stocks, sectors and ideas. These players include traders, pension funds, endowments, hedge funds and even actively managed mutual funds.

The trick with actively managed funds, like individual stocks, is to know when the manager’s run is done. A lot of people got caught holding Legg Mason Value Trust after Bill Miller’s fantastic run.

Actively managed funds can offer a bit of juice for an Index plus strategy.

By: ObliviousInvestor

ObliviousInvestor — Tue, 10 Mar 2009 17:39:21 +0000

Hi Neal. You’re absolutely right.

By default, if something beats 2/3 of other funds, that means that 33% of the funds out there still did better.

Up to you how well you trust your ability to choose one of those 33%.

By: MoneyNing

MoneyNing — Tue, 10 Mar 2009 17:20:43 +0000

Neal: I generally agree with Oblivious Investor in the passive investing arena.

You are absolutely right in that there will always be actively managed funds who will outperform but I’d say 99.9% of all investors will never have the knowledge or time to move in and out of them to be able to take advantage. As a result, most people just buy some actively managed funds and hope that they work out. Sure, some get lucky and make a fortune, but there are just as many who bought one stock in their life and is beyond rich.

For most people, passive investing is probably the way to go.

By: Neal Frankle

Neal Frankle — Tue, 10 Mar 2009 17:09:17 +0000

The spirit of what you are saying is something I agree with.

I do find however that at times, actively managed funds outperform. If you look at net performance, this is true.

Just because ETF’s and index funds beat 80% or 90% of the funds, doesn’t mean you can’t own the top 10% or 20% of the best performers.

Look at NoLoadFundx newsletter. They rank all the funds and usually the actively managed funds outperform.

But I do appreciate your wise comments as always.