JavaGuy started a thread named "American Funds pushes back against indexing." It links to the company website and data purporting to show that American Funds equity products have beaten their indexes over many decades. I find this credible, but more importantly, active managers in aggregate do beat their indexes before expenses.
I think it's important to point this out because it seems to be an article of faith on personal finance blogs that individual investors cannot improve on the returns of index funds by researching stocks and investing actively. Yet fund managers (including the good, the bad, and the awful) do it despite many disadvantages relative to individual investors.
The biggest disadvantage is size. They may have to manage $10 billion, but you may not have $10 million. They also hold cash to fund withdrawals they can't control. They risk losing clients (who typically chase short-term performance) if they make substantial investments in out-of-favor companies that may take several years to pay off.
Individual investors can also manage their portfolios to optimize their personal tax burden, thus improving after-tax returns, the ultimate bottom line.
There is no reason to believe that a busy physician (lawyer, engineer, etc.) with no financial training can beat indexes. On the other hand, if you have the time and the interest, why shouldn't you be able to use the advantages above to improve upon the pre-expense, market-beating returns of active managers?
For example, WCI must have invested enormous time and effort in this blog and related speaking engagements over a number of years. Many other physicians invest time and money and suffer a significant hassle factor to build a real estate portfolio. Blogs and rental properties may provide attractive returns or losses (measured in time or money), depending on the ability and work ethic of the blogger/landlord.
I contend that effort invested in equity management is the same, but apparently this is a minority opinion.
I think it's important to point this out because it seems to be an article of faith on personal finance blogs that individual investors cannot improve on the returns of index funds by researching stocks and investing actively. Yet fund managers (including the good, the bad, and the awful) do it despite many disadvantages relative to individual investors.
The biggest disadvantage is size. They may have to manage $10 billion, but you may not have $10 million. They also hold cash to fund withdrawals they can't control. They risk losing clients (who typically chase short-term performance) if they make substantial investments in out-of-favor companies that may take several years to pay off.
Individual investors can also manage their portfolios to optimize their personal tax burden, thus improving after-tax returns, the ultimate bottom line.
There is no reason to believe that a busy physician (lawyer, engineer, etc.) with no financial training can beat indexes. On the other hand, if you have the time and the interest, why shouldn't you be able to use the advantages above to improve upon the pre-expense, market-beating returns of active managers?
For example, WCI must have invested enormous time and effort in this blog and related speaking engagements over a number of years. Many other physicians invest time and money and suffer a significant hassle factor to build a real estate portfolio. Blogs and rental properties may provide attractive returns or losses (measured in time or money), depending on the ability and work ethic of the blogger/landlord.
I contend that effort invested in equity management is the same, but apparently this is a minority opinion.
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