Mutual Funds - General Discussion

Top 644. Dec 28, 2004 6:47 PM

» Normxxx - Re: Re: Paul Merriman and buy n hold

In response to Re: Paul Merriman and buy n hold posted by bob90245:

In his own words, he developed the "Ultimate B & H Portfolio" which uses DFA for those of his advisees that were too conservative to "time the market."

I subscribed to his (at the time free) market letter for a time.

A good question is whether the higher fees for active management will produce better returns than the passive management with lower fees.

By my calculations, no. He does well, without fees even to equal the market (mainly on the basis of good early-- paper-- stats).

But, I suppose you would have to discuss that with him. Stats are very flexible things.

-- posted by Normxxx

Top 645. Jan 1, 2005 7:41 PM

» bob90245 - 2004 Returns From Morningstar.

2004 Returns From Morningstar.com

Domestic Stock Funds
31.71 Specialty-Real Estate
28.47 Specialty-Natural Res
23.43 Specialty-Utilities
22.61 Specialty-Communications
20.46 Small Value
18.87 Small Blend
17.95 Mid-Cap Value
16.03 Mid-Cap Blend
13.76 Specialty-Financial
12.93 Mid-Cap Growth
12.82 Large Value
12.09 Small Growth
9.94 Large Blend
9.25 Specialty-Health
8.49 Moderate Allocation
8.42 Convertibles
7.55 Large Growth
5.76 Conservative Allocation
3.89 Specialty-Technology
-8.04 Specialty-Precious Metals
-14.21 Bear Market

International Stock Funds
38.26 Latin America Stock
25.05 Foreign Small/Mid Value
23.97 Foreign Small/Mid Growth
23.68 Diversified Emerging Mkts
21.78 Foreign Large Value
21.01 Europe Stock
17.62 Foreign Large Blend
16.97 Diversified Pacific/Asia
15.45 Foreign Large Growth
15.19 World Stock
14.18 World Allocation
13.03 Pacific/Asia ex-Japan Stk
12.62 Japan Stock

Fixed-Income Funds
11.93 Emerging Markets Bond
9.85 High Yield Bond
8.74 World Bond
7.92 Multisector Bond
7.82 Long Government
6.19 Long-Term Bond
3.86 Intermediate-Term Bond
3.7 Bank Loan
3.38 Intermediate Government
1.55 Short-Term Bond
1.3 Short Government
1.16 Ultrashort Bond

-- posted by bob90245

Top 646. Jan 17, 2005 4:13 PM

» TMStock - A few questions related to Slice and Dice

Hello again. I am not sure if I am still in the right place. I noticed that no one has posted here for some time, whilst other threads have posts as recent as yesterday.

In any case I'll give it a try here:

I have read most of the links and threads suggested to me related to Slice and Dice (S&D), and I just finished reading Paul Farrell's book "The Lazy Person's Guide to Investing". I still plan on reading "The Four Pillars" and "Rational Investing in Irrational Times" as soon as I can check them out from the local library. From what I've read so far I have a few questions I'd sure appreciate if anyone could answer:

The first four questions kind of overlap each other:

1. Since VFINX is an S&P 500 index fund, doesn’t it include a mix of value and growth?

2. Since NAESX is a Small Cap index fund, doesn’t it include a mix of value and growth?

3. If the answers to the two above questions is “yes”, then does that mean S&D does not aim to replicate indexes exactly and divide them up, rather it aims to have a greater concentration in Value than Growth? Or is the main reason correlation/diversification?

4. Does the S&P 500 Index + the Small Cap Index = the Wilshire 5000 index? Is a Mid-Cap index missing from this equation? If so, then why do none of the sample S&D portfolios contain any mid-cap funds?

5. Where can I go to learn more about the makeup and differences in the Russel, Wilshire and other indexes?

6. For an international exposure, why do some people prefer actively managed funds over an index fund (for example, VWIGX instead of VGTSX or VDMIX, or FDIVX instead of the Spartan International Index)?

7. Farrell’s book gives a couple of charts from Paul Merriman. One shows a 20-yr. performance (1981-2000) from the Dimensional Fund Advisors database. It shows International large-cap value stocks beating out all the other asset classes except U.S. small-cap value stocks. Another chart from the same database shows International value stocks averaging over 18% from 1975-2000. Yet if I want to include an international value index fund to my portfolio I cannot do it with Vanguard. Vanguard does have the International Value Fund, which is actively managed, has an expense ratio of .56%, a turnover rate of 48%, and an average return (since inception in 1983) of 11.12%. Also, I noticed that none of the sample/suggested S&D portfolios contain any international value funds. Any comments or suggestions on this?

-- posted by TMStock

Top 647. Jan 17, 2005 6:18 PM

» bob90245 - Re: A few questions related to Slice and Dice

In response to A few questions related to Slice and Dice posted by TMStock:

Hello again. I am not sure if I am still in the right place.

There worse are places, but this is fine. <img src=http://www.suite101.com/images/emoteicon...> There is a Slice and Dice thread. It rolled off the active treads. You can see all the threads here.

1. Since VFINX is an S&P 500 index fund, doesn’t it include a mix of value and growth?
2. Since NAESX is a Small Cap index fund, doesn’t it include a mix of value and growth?
3. If the answers to the two above questions is “yes”, then does that mean S&D does not aim to replicate indexes exactly and divide them up, rather it aims to have a greater concentration in Value than Growth? Or is the main reason correlation/diversification?

Yes. Yes. Yes. and Maybe.

There are two reasons to assign VFINX and NAESX to "growth" and VIVAX and VISVX to "value". The first reason is that back in the bubble days, VFINX was tilted heavily to growth stocks. The second reason is that by choosing VFINX and NAESX, under "normal" market conditions, they would be a blend of growth and value. So along with VIVAX and VISVX, you would be tilting your overall portfolio to value. The reason to tilt to value is that value has had higher historical returns than growth. So the hope is that a tilt to value will give the investor higher long-term returns.

4. Does the S&P 500 Index + the Small Cap Index = the Wilshire 5000 index? Is a Mid-Cap index missing from this equation? If so, then why do none of the sample S&D portfolios contain any mid-cap funds?

Yes. Yes. and very good question! I'm guessing that the answer the academics would give is that mid-caps returns would be a blend between large- and small-caps. So therefore mid-caps may not give the portfolio the diversification benefit.

5. Where can I go to learn more about the makeup and differences in the Russel, Wilshire and other indexes?

This is not so easy. The way I do it is look up the equivalent ETF at www.amex.com for the specific ETF ticker. Then I would go to morningstar.com, enter the ETF ticker and click on "Portfolio".

6. For an international exposure, why do some people prefer actively managed funds over an index fund (for example, VWIGX instead of VGTSX or VDMIX, or FDIVX instead of the Spartan International Index)?

This is a tricky question. Fidelity is my 401k sponser, and FDIVX is my only choice for international. I guess the answer is that with an actively managed int'l fund, the manager can overweight (or underweight) different areas (Europe, Asia, Emerging) in order to beat an index such as VGTSX.

Also, I noticed that none of the sample/suggested S&D portfolios contain any international value funds. Any comments or suggestions on this?

You've got me there. Seems like you're limited to VTRIX or similar managed Int'l Value fund. One other interesting factoid about the historical returns for international. The Japanese bubble and burst before and after 1989 had a disproportional impact on the int'l index as a whole. So keep that in mind in your analysis.

Good questions!

-- posted by bob90245

Top 648. Jan 18, 2005 6:48 PM

» Normxxx - Re: A few questions related to Slice and Dice

In response to A few questions related to Slice and Dice posted by TMStock:

1. Yes.
2. Yes
3. Yes. Yes.
4. No. Yes, and a few thousand minor stocks. Don't know; it's a good idea. I suspect that they feel the added complication is not worth any possible gain.
5. Start with a web search; if I run across such a site on my own saved URLs, I'll post.
6. International stocks are far more dangerous and volatile. Within the year, several foreign stock markets have cratered (most notably India, which lost almost 50% in less than a week when the new Government was elected). Someone knowledgeable must keep his eye on these markets at all time, shifting money from markets that are 'cooling off' to markets that are 'heating up.' If that someone is not or cannot be you, then you'd better not buy a passive International fund. Even active funds are only as good as the fund manager and vary widely in performance. For the average investor, they are not normally worth the risk. They've had a good few years here because the dollar has dropped from 10% to 40% against most foreign currencies. Investing in foreign stocks means you are betting against the dollar going up substantially here.
7. I'll pass.

"You are old, father William," the young man said,
"And your hair has become very white;
"And yet you incessantly stand on your head --
"Do you think, at your age, it is right?"
"In my youth," father William replied to his son,
"I feared it would injure the brain;
"But now that I'm perfectly sure I have none,
"Why, I do it again and again."

"You are old," said the youth, "as I mentioned before,
"And have grown most uncommonly fat;
"Yet you turned a back-somersault in at the door --
"Pray, what is the reason of that?"
"In my youth," said the sage, as he shook his grey locks,
"I kept all my limbs very supple
"By the use of this ointment -- one shilling the box --
"Allow me to sell you a couple."

"You are old," said the youth, "and your jaws are too weak
"For anything tougher than suet;
"Yet you finished the goose, with the bones and the beak --
"Pray, how did you manage to do it?"
"In my youth," said his father, "I took to the law,
"And argued each case with my wife;
"And the muscular strength, which it gave to my jaw,
"Has lasted the rest of my life."

"You are old," said the youth; one would hardly suppose
"That your eye was as steady as ever;
"Yet you balanced an eel on the end of your nose --
"What made you so awfully clever?"
"I have answered [six] questions, and that is enough,"
"Said his father; "don't give yourself airs!
"Do you think I can listen all day to such stuff?
"Be off, or I'll kick you down stairs!"

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 649. Jan 19, 2005 9:26 AM

» bob90245 - Whether to add International

.
It is absolutely true that International is more risky and has produced lower historical returns than the S&P 500. Clearly, there must be other reasons to add international to a diversified portfolio. Let's examine the evidence.

Here we see that by itself, International produced returns of 9.4% and had a standard deviation of about 19.2%. Standard deviation (SD) is a measure of volatiltiy. Lower SD is better.

According to the chart, we see that by adding up to 40% International to a portfolio of the S&P 500, SD reduces from 18% to about 16.2%. Yes, this did reduce the returns of the portfolio with just the S&P 500. But the reduction of returns appears only slight compared to the advantage of reducing the volatility of the overall portfolio when combining International.

The other benefit of adding International comes when comparing returns on a year-by-year basis.

So when one asset class performs poorly, the other may be doing well. This is not a prediction. After all, past performance may not indicate future returns (the standard disclaimer). But as has been said before, the past may not repeat, but it probably will rhyme.

-- posted by bob90245

Top 650. Jan 19, 2005 11:27 AM

» Normxxx - Re: Whether to add International

In response to Whether to add International posted by bob90245:

In past years, foreign stocks (especially small value) have proved both an excellent investment and, more to the point, an investment class with poor correlation to the domestic U.S. market (which is what one looks for in a S & D asset class). But in recent years (say the last 15 years or so), the international market has become so dependent on the U.S. market that that lack of correlation has all but broken down.

More recently (say the last four years or so), however, most foreign stocks have done well because of the plunge in the dollar, but regardless of what you think of our current economic position in the world, FOREX is one of the riskiest markets to follow. Investing in foreign assets (except as a limited hedge) because you think the dollar will drop much further, is an extremely risky bet.

Because of the current instability of the international markets, I don't think it is wise to invest in a passive international fund, unless you are willing to "play" the market with it (i.e., varying the percent or varying the risk profile of the international investment class). Conversely, for the astute investor, putting substantial funds into the international asset class is probably among the wisest things to do.

The passive investor is likely to do best by waiting for a "crash" in the international markets (which come frequently enough-- we had a mini-crash early in '04), then investing in a widely diversified fund.

You might also note that the domestic and foreign markets seem to alternate-- two to six years of up markets for the one, then the same for the other. The swing in the trade weighted value of the dollar may have something to do with that.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

http://flagship5.vanguard.com/VGApp/hnw/...

Top 651. Jan 19, 2005 12:44 PM

» bob90245 - Re: Re: Whether to add International

In response to Re: Whether to add International posted by Normxxx:

Let's do a small edit...

The ~~passive~~ active investor is likely to do best by waiting for a "crash" in the international markets (which come frequently enough-- we had a mini-crash early in '04), then investing in a widely diversified fund.

Interesting strategy. Looks like the first and third quarters are ones to avoid.

-- posted by bob90245

Top 652. Jan 19, 2005 2:27 PM

» Normxxx - Re: Re: Re: Whether to add International

In response to Re: Re: Whether to add International posted by bob90245:

It's the method I use for my Emerging Markets assets' class, and I don't classify myself as a passive investor. I get in after a crash and get out when things are getting really frothy. It seems to be the only way to time these markets. They will just about always dive with the U.S. markets, but then dive as well, from time to time, all on their own.

Recognize, that a huge percentage of the money in Emerging Markets is 'hot foreign money,' some from Europe, but mostly from the U.S.! (You can actually do very well by buying after a 'crash,' and then making sure you get out at the next top "too early!")

I advocated that 'entry' startegy for a 'passive' investor for a widely diversified fund so that he would be less likely to 'panic' out on the next ride down.

As you can see, the Indian stock market lost about 22% in May, but has more than recovered since then. It is now somewhat down from its post-crash 33% upmove peak.

-- posted by Normxxx