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Active vs Passive Management

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  • Active vs Passive Management

    I have a financial advisor who I'm trying to wean myself off who has my small IRAs (both Roth and trad) invested in the following actively manages funds: American Balanced fund, Capital World Growth Income fund, Smallcap World fund, Fundamental Investors fund.

    I asked him to compare that with Vanguard's total stock and international stock funds as far as returns and expense ratios go ($60K vs $50K return for vanguard after expenses) and he said overall the returns of the actively managed ones are higher. He also said that the thought of passive investments while generally outperform active ones, it's very dependent on the active ones you find and these are the good ones.

    Any thoughts to this logic since most of what I've read has been the opposite?

  • #2
    Do you know what share-classes you are using for each of the funds? How is your adviser compensated?  Is your adviser fee-only?  Many advisers I have seen that only use American Funds select them because the commissions are relatively high.  I also have trouble believing that the American Funds would have outperformed Vanguard by that amount.  I'd have to see your exact allocation though to be certain.

    There are active managers that outperform passive.  It's very easy to look historically and see which manager's did better.  The hard part is this tends to be mean reverting so even though they did well the past 5 years, doesn't mean they will do well in the future and an active manager's strategy probably won't work well in all market environments.  I'm not totally against active, but I believe the core of any portfolio should be passive-low cost funds.


    • #3
      I suppose I'd ask for a bit more rationale behind simply saying "These are the good ones." However, the answer to your request is not an opinion but a matter of fact for the specific fund comparison you requested.

      otoh, you will find much writing and argument on both sides of the active v. passive debate. Yes, there are good active funds. Yes, passive investing is popular and has many proponents.

      I am Switzerland.
      My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
      Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


      • #4
        Keep in mind that when you compare active versus passive management that not every active fund is going to do worse than passive management even with fees. The question is can your advisor continually pick the ones that will do better. There is a lot of survival bias in these funds. 


        • #5
          They are Class A (I think that's admiral's?). Also the spread is even amongst all the shares as well, so about 25% each. He is commission based (before I knew better) and is from Edward Jones.

          Jfoxcpacfc, while wci has been my initial source of info, I guess I haven't seen much on active management even on related sites or forums. I am trying to have a logical path for switching strategies rather than follow simply what I've read without understanding the core reasoning. Thanks.


          • #6
            You've already given enough information. You're at Edward Jones and your advisor is using A funds (loaded funds). That's your logical path for switching strategies, nothing more needs to be said.
            My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
            Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


            • #7
              You don't have a financial advisor.  You have a salesmen.  Actively managed funds do not out perform the index overall, load funds least of all.  You are intentionally being steered toward funds that will extract the maximum amount of wealth from you, and transfer it to your advisor.  You have signed on to a sales firm, who's interests are not aligned with your's.

              How long you wish to continue your relationship is up to you.

              (Per the above previous post) PS, I'm going to be kind to Crixus and say that I don't always disagree with everything he says, and there is a place for doomsdayers ideas in your overall investment analysis, but his thoughts on the subject here are...  let's say, controversial, and for advanced debate, not for someone who is learning about high loads for the first time.


              • #8
                My wife owns a small business and has her 401k fund through Edward Jones and AF. Class A shares come with a 5.75% load meaning that you give them $5.75 for every $100 you invest (and thus only buy $94.25 of the fund).  Fortunately, my wife's 401k has R3 shares with no load but still have around 1% expense ratio.  AF has not beaten the index funds, but they are very similar for the past 15 years or so after fees if you're not comparing class A shares. I looked at these because my wife is trying to convince her partner to change the 401k to employeefiduciary.

                OP, you could post where your money is now on the forum and you would have 8 different, better allocations in low cost index funds in about a day, for free.


                • #9
                  Do you have anything that I can read to get more info on this Crixus? It would be great to read something like that if you do.

                  And I'm glad I know how screwed I'm getting and while I had that feeling it's good to get unanimous consensus. Luckily, better to know now and that's why I set this goal before I amass enough money to loose out significantly on some of my retirement.


                  • #10
                    urgh - is there nowhere on the internet I can go without hearing from the Zero Hedge, central bank conspiracy theorist doom merchants!

                    I really thought I had found somewhere quite sensible with the WCI forum.



                    • #11
                      I have to agree with Jaquen your advisor is a salesman.  Not only do the American Funds have loads but their ER is usually lots higher than Vanguards.  It sounds like your funds are in tax protected spaces.  You could call the Edward Jones guy and tell him to sell all these by the end of business Monday.  Then instruct him to buy Vtiax and Vtsax with the money.  If you control where your retirement plan is housed then pick up the phone and begin transferring it to Vanguard (SChawb or Fidelity are also ok).  Inertia will hurt you.  If you can't move the entire plan then control what is in it.  You will incur no capital gains.  Pick your own investments and follow an asset allocation.  Let your control freak self feel better about your retirement.