Re: Asset Allocation , part 2

From: "Steve Foulks" <steve_foulks@up.bresnan.net>
Subject: Re: Asset Allocation , part 2
Date: Sun, 9 Aug 1998 20:35:24 -0400
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> Date: Wed, 05 Aug 1998 23:00:53 -0400
> From: Randy Barnes <rbarnes@mindspring.com>
> Subject: Re: Asset Allocation , part 2
>
> >Really?  If I had to choose, I would choose Vanguard Windsor II for the
> >longer haul.  It has the same beta as Janus and charges less in internal
> >transaction fees.  If I had my choice, I would own both Windsor II which
> >is a more value-oriented stock fund and Janus, which is a more
> >growth-oriented fund.
>
> Performance: Trailing Return %  (SOURCE:  Morningstar)
>                                                            3 Yr    5 Yr
>                                     1 Mo    3 Mo    1 Yr     Avg     Avg
> ........................................................................
> S&P 500 Index                       4.06    3.30   30.15   30.22   23.06
> Janus                               6.01    6.12   31.99   25.60   19.23
> Vanguard/Windsor II                 1.33    1.80   30.43   30.18   22.29
> Vanguard/Windsor                   -0.79   -2.24   17.01   22.35   19.03
> ~~~~~~~~~~~
>
> Primo,
>
> Three cheers for your opinion and input. Serious discussion of
> investment topics has been pretty lame around here for a good while. I
> applaud your effort and think you could be right.
>
> I took a second look at the reasons I'd picked Janus in the first place
> and rediscovered another reason I'm no fan of mutual funds. Fund data is
> available in a million places but it is very inconsistent and VERY easy
> to manipulate.
>
> I too went to Morningstar to get a peek at performance figures etc. This
> is where I found the data that led to my previous post. The funny thing
> is that the figures I find aren't the same as those you quote. Sometimes
> different services report different figures and sometimes the same
> service reports different figures for the same thing. Go figure;-)
>
> At the following links you'll see Janus beating the S&P in the 10 year
> time frame buy better that 1%. THe WinsorII lags the index, as does just
> about every mutual fund in the universe. I give Janus the nod, with a
> 1.68% advantage (at least using this particular quote).
>
> Janus -
> http://www.morningstar.net/FundQT/RR_Performance/JANSX.msfhtml
> Winsor -
> http://www.morningstar.net/FundQT/RR_Performance/VWNFX.msfhtml
>
> A small account of $200 per month for 10 years gains $7,600 more using
> the Janus 10 year figure. (Ignoring taxes completely!)
> [pv=-200,pmt=-200,n=12,r=.x/12] - Careful. The next 10 years results
> will be different.
>
> Now, this brings to mind another question. Are the S&P returns inclusive
> of dividends, or not?  THis is quoted both ways depending on who is
> reporting. Before you know it you've written a thesis on which mutual
> fund manager beat the market, or at least came close.

The S & P 500 index measures total return, which includes dividends.

>
> SPYders,(or index funds if you have a very small account), will
> outperform almost every mutual fund over the long haul. SPYders are far
> less trouble to own, and will serve you better for the future, with much
> less energy.  Save money by not buying crap like magazines with "10 HOT
> Funds to Buy NOW!!" on the cover. Instead, buy yourself a self-help
> book, put an extra few bucks in your account, buy a kid something
> foolish, take a class, you get the picture. Use the savings to not pay
> your accountant to figure out the mutual fund statements you will no
> longer get each year. Even more valuable than the money is the time. If
> your time isn't worth $20-100 an hour then get busy and figure out what
> you need to learn to make something of yourself.
>
> For SPY info see - http://www.amex.com  or
> http://www.fool.com/funds/funds5.htm
>
> One more tidbit. The S&P is always got a wonderful blend of growth and
> value stocks. No muss, no fuss.
>
> FYI, I DO own positions in 2 funds, but only in a 401k, and there I have
> no tax issues (for now) and I don't have much to choose from. We don't
> even have an index fund in the mix .(Not my decision!)
>
> I am not really trying to flame mutual funds. (lie) It's just that
> anyone with a little common sense and intelligence soon sees the fact
> that funds are too often laggards. Smart money just buys the market and
> leaves it alone.
> (still my favorite link, see:
> http://www.pathfinder.com/fortune/investor/1998/980706/dfa.html
>
> If you're like me and must spend hours knee-deep in invest-o-mania, then
> stick to owning stocks, not funds.  Statistics have shown that owning
> just 16 stocks eliminates 93% of market risk, so the diversification
> issue that this started with is sorta meaningless.  The average person
> really can beat the market, but not in a fund.

While I agree with your basic premise that non index mutual funds are
generally poor investments, I disagree with your premise that "the average
investor can beat the market"  It just doesn't make sense.  Mutual funds are
run by average people who have been trained in financial analysis.  The
reason why mutual funds underperform the market is due to transaction costs
(management fees, brokerage fees, mailings, etc.) A study by Michael Freund
in the 1970's showed that when you eliminate transactions costs, mutual
funds performed exactly like the market.  Since professionals perform
exactly like the market, how can average people (non professional managers)
beat the market?

In fact US stock markets are highly efficient, which means that on average
NO ONE is going to beat the market, and those that do may just be lucky?.

If capital markets operate in this fashion, what do you do?  Low cost mutual
funds are one alternative, and the other is to construct a well diversified
portfolio of individual stocks, and hold them for ever, which is my
strategy.  I never look at annual reports, investment news letters, etc.
Rather than wasting hours analyzing knee deep out dated investment crap,  I
enjoy life.  My returns have been better that the market, because I
generally chose blue chip stocks, not because I "time" the market, or know
how to pick winners.  I buy stocks when I have money and would only sell
stocks if I needed money.  If I spend an hour a month thinking about my
investments, that would be an unusual event.

Obviously financial publications (Barron's, Value Line), financial
institutions (brokers, banks, etc.) have a vested interest in convincing you
that you can beat the market if you just buy their services.  They like to
pooh pooh the notion that capital markets are efficient, and most investors
like to believe them because it feeds their fantasy that the stock market
offers get rich quick potential, for those who really do their work!

Steven M. Foulks, CPA, CFP, PhD
<http://www-instruct.nmu.edu/business/sfoulks/>

Northern Michigan University <http://www.nmu.edu/home.shtml>





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