Best No Load Mutual Funds http://www.bestnoloadmutualfund.com Best No Load Mutual Funds Wed, 05 Aug 2009 19:25:29 +0000 http://wordpress.org/?v=2.3.3 en BestNoLoadFundshttp://feedburner.google.com Vanguard Index Mutual Funds Versus Vanguard Managed Funds http://www.bestnoloadmutualfund.com/vanguard-managed-and-index-mutual-funds-17.htm http://www.bestnoloadmutualfund.com/vanguard-managed-and-index-mutual-funds-17.htm#comments Mon, 26 May 2008 19:56:44 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/vanguard-managed-and-index-mutual-funds-17.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

Vanguard Index Mutual Funds Versus Vanguard Managed Funds

Go to Part 2: Vanguard Mutual Fund Investment Newsletter >>>>>>>

This two-part article:

1) summarizes a recent research report that compared Vanguard’s passively managed index with Vanguard’s actively managed (The title of this study by Abel Rodriguez and Edward Tower is “Do Vanguard’s Managed Funds Beat Its Index Funds?” provide links to it below. If you invest in any of Vanguard’s investment fund products, I recommend that you read and understand this study.)

2) discusses an email promotion for an , which claims that it has consistently out-performed and will continue to out-perform Vanguard’s passively managed index . (This email solicitation came from Dan Wiener, the editor of The Independent Adviser for Vanguard Investors.)

Use a very low cost, fully passive, and globally

Neither this study nor this email promo has changed my fundamental investment viewpoint, which I summarized in the subheading just above. I strongly advocate to my readers and to financial planning clients that they use an investment fund based strategy that is very low cost, fully passive, and globally diversified. The Rodriguez-Tower study enriched my understanding of Vanguard’s mutual fund offerings and strengthened my convictions. On the contrary, Dan Wiener’s promotion was not terribly enlightening.

Regular readers of my Objective Family Finance Blogs network know that I consistently advocate a very low cost, fully passive, and globally for an individual investor’s personal portfolio. Therefore, I will not repeat my reasoning in this article regarding this investment strategy recommendation.

Instead, I will refer you to these articles, which have previously been published on my Objective Family Finance Blogs network. In particular, see these articles:

I am also a regular, avid reader of the Journal of Indexes, which you too can read at IndexUniverse.com. Index Universe is a content rich website for index investors, and the Journal of Indexes is one of the few financial publications that I consider to be “must reads.” In its March/April 2008 issue, which was entitled “Active vs. Passive 2.0,” the Journal published an enlightening article entitled: “Do Vanguard’s Managed Funds Beat Its Index Funds?”

Do Vanguard’s Managed Funds Beat Its Index Funds?

“Do Vanguard’s Managed Funds Beat Its Index Funds?” was co-written by Abel Rodriguez, now Assistant Professor of Statistics at the University of California Santa Cruz and by Edward Tower Professor of Economics at Duke University. Their paper in the Journal of Indexes was based on Abel Rodriguez’s master’s thesis at Duke, which Professor Tower supervised. This investment research journal article was further developed by Rodriguez and Tower, as Rodriguez worked on his PhD in statistics at Duke.

I was particularly interested in this analysis, because of what I might learn about passive index investing and active management comparisons at the portfolio level, which is what counts in personal investment management. More so than any other investment fund company, The Vanguard Group has offered a very wide array of passive for many years. More recently, they have also offered more actively managed , albeit still with very low costs. Additionally and more recently, Vanguard has introduced an array of index ETFs. While actively managed, Vanguard’s managed funds have management expense ratios, which are far below averages for other competitive funds in the mutual fund industry.

Active mutual fund managers simply do not earn their management expense ratios and transactions costs

Briefly, the problem with active management is that, while professional investment managers have been show to demonstrate a modest average level of skill (see in particular, research by Wermer, et. al.), unfortunately their management expense ratios are much higher than their apparent skills. On average, the excessive management expenses of active money managers are over double the value of their incremental performance gain. This, of course, wipes out any incremental performance advantage that professional money managers might provide, if direct portfolio management expenses were all that you considered.

Other factors further complicate the active investment fund cost situation. First, except for choosing very low cost funds there is no reliable way to discern beforehand which manager might out perform another to justify his high fee. Second, mutual fund transactions costs roughly are roughly equal an active mutual fund’s . The more active the fund and the higher the turnover, the greater the transactions costs

Excessive costs and the inability to identify reliably supposedly superior money managers before the fact, creates a compelling financial logic for the individual investor. To improve your net , you are compelled to move to the low cost end of the mutual fund and ETF spectrum. When you do this, you must also more to the completely passive, indexed end of the product spectrum.

In this process, you soon realize that only Vanguard, Fidelity, and a handful of other investment fund companies offer very low cost investment funds. All the rest of the fund families seem to present their clients with a beat-the-market, 4-star and 5-star fund, hustle. Of course, securities markets are the great levelers. Some funds will win and others will lose. Over time most winners become losers and vice versa. For decades, this game has been is been very good for the shareholders of the and not so good for shareholder-investors within these actively managed funds.

Vanguard’s Low Cost Index Mutual Funds and Vanguard’s Managed Funds

This “Do Vanguard’s Managed Funds Beat Its Index Funds?” investment research article offered an opportunity to understand in more detail the trade offs between active and passive within the overall Vanguard product family. To summarize the major conclusions of this study very briefly (It is worth you reading it yourself!), the study generally concluded that over the four year 2003 to 2006:

  • Vanguard’s passive beat Vanguard’s actively managed funds, when there was a relatively close investment style benchmark between passive and active funds. Rodriguez and Tower said “investors would be well-advised to buy instead of managed funds in situations where those funds closely track their index fund baskets.” (p.31)
  • When all passive and actively managed funds were combined into separate portfolios, over these four years, the managed portfolios had “an average out performance of .46%, which was not statistically significant. Much of this differential was explained by the extraordinary performance of the Vanguard International Explorer, Capital Opportunity, and Primecap funds.” (p.29) In essence, this did not prove or disprove the active versus passive question analyzed within the context of Vanguard’s fund offerings. There simply seemed not to be any comparable Vanguard for comparison. Rodriguez and Tower observed that “when managed fund performance is not well explained by a tracking index fund basket, investor may look toward the managed funds.” (p.31)
  • Vanguard managed funds were more risky in general, and their managers did not make prescient style adjustments, as market returns for different investment styles (e.g. growth versus value) fluctuated.
  • Also, quoting this study, “the managed funds on average have expense ratios that are .26% greater than their corresponding tracking index. They also had turnover rates that are 33% greater than the tracking index.” (p.31) It is critical to realize that Vanguard’s managed funds really are very low cost managed funds. Industry averages for management expense ratios are about twice as high or more. The higher the costs and the greater the turnover, the more ground an expensive, high turnover has to cover just to break even with their lower cost, passive index competitors.

To conclude summary of this investment research paper, I would also like to point the reader to some discussions of this paper on Internet forums. Unlike many discussion forums, which often devolve into unproductive emotionalism and bickering, these forum discussions of this research study really are quite informative.

In addition, Professor Tower has participated in these forums, and he used these discussions as a sounding board for ideas and as a means to clarify certain aspects of this study. I recommend these forum conversations to anyone who has or intends to hold a significant portion of his or her personal investment asset portfolio in Vanguard’s , managed funds, and/or ETFs. Use these links to find these forums:

The historical record of Dan Wiener’s Growth Portfolio

Along with introductory quotations from Paul Merriman and John C. Bogle, the “Do Vanguard’s Managed Funds Beat Its Index Funds?” investment research paper also included an introductory quotation from Dan Wiener. Dan Wiener publishes and promotes an called The Independent Advisor for Vanguard Investors.

Dan Wiener’s quote in the Rodriguez-Tower paper accused Vanguard of lying to its customers, delivering inferior performance with its , and exposing its fund shareholders to the “worst risks of bear markets.” (p.27) When I first read this research paper, I was curious about why the Rodriguez-Tower investment research study even needed to include these comments by Dan Weiner. Also, I wondered why his comments needed to be so incendiary. However, I did not pay much attention to these statements, because they were largely peripheral to the main analysis of the Rodriguez and Tower study.

Near the conclusion of their investing research paper, Rodriguez and Tower briefly addressed the performance of Dan Wiener’s Growth Portfolio. Apparently, Dan Wiener’s has been a strong advocate of using Vanguard’s managed fund offerings. Furthermore, it seems that his newsletter focuses solely upon investing strategies that can be implemented with Vanguard’s passive , actively managed funds, and ETFs. As I understand it, Dan Wiener’s The Independent Advisor for Vanguard Investors investing strategy newsletter does not provide alternative fund recommendations from any other .

In their study, Rodriguez and Tower stated that Dan Wiener’s Growth Portfolio had demonstrated performance over the prior nine years that outperformed the Wilshire 5000 index by 5.44% annually. Since January of 1992 or over about 16 years, the Growth Portfolio from this personal apparently had delivered average annual returns that were 2.27% greater than the Wilshire 5000 index. In addition, portfolio risk also seemed to have been lower.

Using The Hulbert Financial Digest and the Wilshire 5000 to benchmark Dan Weiner’s historical Growth Portfolio performance

Dan Weiner’s Growth Portfolio performance was not central to the analysis of the Rodriguez and Tower study. Instead, they briefly commented on it, after they had finished the presentation of their study methodology and results, and they were wrapping up their paper. Rodriguez and Tower used separate data that they obtained from The Hulbert Financial Digest, which is an evaluator of performance.

With The Hulbert Financial Digest data, they commented that the 16 years of 2.27% average out-performance of Dan Weiner’s Growth Portfolio was statistically significant at the 13.4% confidence level using a standard t-statistic test. The t-statistic test is a very limited statistical test, and it is used when there are too few data points to use other more robust statistical tests. The t-statistic test simply measures the likelihood of that the average or mean of one small data set is different than the mean of another data set due to something other than simple randomness.

In essence, a 13.4% confidence level implies that there is about a 1 in 12 chance that the difference was purely random rather than likely being due to some other non-random cause or causes. In this case, the non-random cause could be investment skill, lack of comparability of Dan Wiener’s Growth Portfolio and the Wilshire 5000, and/or some other controllable or uncontrollable influence. A t-statistic test makes no judgment about the magnitude or cause of any differences. A t-statistic test compares the averages sparse data sets. A t-statistic test is historical in nature and not predictive.

Someone might be tempted to construe this 13.4% statistical confidence level as evidence of investment skill on the part of Dan Weiner. However, it is also important to point out that standards of statistical proof in investment, economics, and other social sciences research papers almost invariably require a 5% (a 1 in 20 chance) or even 1% (a 1 in 100 chance) confidence interval. In thirty years of reading statistical research papers, I have never seen a peer-reviewed statistical research paper where the author considered that a statistical hypothesis had been proven, when the data did not achieve even a 10% confidence level (or a 1 in 10).

Finally, given the core findings of the Rodriguez-Tower study and Dan Weiner’s apparent Growth Portfolio results, it is interesting to speculate about the source of any out-performance. Since Rodriguez and Tower gave the advantage to Vanguard’s lower cost passive when a more expensive index fund more closely tracked the benchmark, out performance would likely come from another source. One candidate explanation would be to weigh heavily higher growth funds that lacked a passive index counterpart, such as Vanguard Capital Opportunity, International Explorer, and Primecap. Another would be to question whether the Wilshire 5000 was an appropriate benchmark, especially if the source some of these apparently superior returns was international.

I do not know the answer, because the Rodriguez-Tower study only took a cursory look at Dan Weiner’s Growth Portfolio results. Nevertheless, findings of the Rodriguez-Tower study Dan Weiner’s Growth Portfolio results remain anomalous. There seems to be some skill or luck and/or some inappropriate benchmarking going on someplace.

Superior results, investment costs, taxes, and selective marketing

Despite the previous discussion, let us be gracious and assume that the Dan Wiener performance data are accurate and furthermore let us also assume that that the Wilshire 5000 is an appropriate benchmark for a Growth Stock index. Granting this, then a 2.27% average annual incremental advantage - skill based or luck based - would yield about 43% more in gross assets over 16 years, if the baseline index did not grow over this period. (This ratio would shrink slightly depending upon the growth rate of the . If the grows 10% annually, then 2.27% incremental growth or 12.27% total annual growth yields a 39% advantage.)

However, since this performance advantage comparison is made with an index without management expenses or taxes. Therefore, the percentage performance advantage above would need to be reduced to the extent that investment expenses and investment taxes were incurred. Therefore, the supposedly superior, skill based performance results of Dan Wiener’s ’s Growth Portfolio may not be all that they might seem.

In addition, the securities and financial services industry has turned selling of and a “beat the market” strategy into an art form. Unfortunately, millions of individual investors fall into the financial industry’s “we will do better for you” trap. So very few individual investors track carefully their actual results over the long term to see how well or poorly they actually have done relative to a broadly diversified, very low cost, passive index investment strategy. (See: What is the cost to individual investors of sub-optimal portfolio diversification? on The Skilled Investor website.)

One of the tactics employed by financial promoters is to selectively market only those financial products that have demonstrated supposedly , while downplaying their mediocre funds and sweeping their laggards under the rug. Instead of providing more details about the marketing games here, instead, I will refer you to some articles on our sister website. See these articles and use the links within them to find more articles that discuss selective investment fund marketing and investment luck versus skill:

In the case of Dan Weiner’s Growth Portfolio historical out-performance of the Wilshire 5000 index, there might be a bit of selective marketing going on here. Dan Weiner also has three other portfolios that he promotes in his , “The Independent Advisor for Vanguard Investors.” The Hulbert Financial Digest analyzes investment newsletters, and it tracks the performance of Dan Weiner’s four portfolios. The Hulbert Financial Digest analyzed Dan Wiener’s four portfolios with the portfolios of other .

In footnote #15 of their study, Rodriguez and Tower commented on information this information from The Hulbert Financial Digest, saying “Wiener’s Growth Portfolio performed better over the 10 years ending December 2006 on both a risk-adjusted and a non-risk-adjusted basis, that his other three portfolios. The odds that one of his portfolios would perform well due to luck are greater than the odds that one particular portfolio will perform well, so arguably our 13.4% figure in the text overstates his portfolio-picking prowess. The March 2007 edition of The Hulbert Financial Digest lists the Wiener newsletter as fifth out of 24 mutual fund newsletters on the basis of total return and tenth out of 24 on the basis of risk adjusted return.” (p.58)

Does Vanguard discriminate against its passive index fund investors, Dan Weiner suggested? Rodriguez and Tower also addressed Dan Weiner’s accusation that Vanguard in some way discriminated against its managed fund customers to favor its index fund clients. Rodriquez and Tower analyzed this and found no data to support this charge.

Finally, Rodriguez and Tower looked at Dan Weiner’s early 2007 buy, hold, and sell recommendations. They said that “we find those managed funds that he (Weiner) rates buy, hold, and sell have average geometric alphas [presumably skill based performance differences] for the four year period of +1.39 percent, -0.83 percent, and -1.66 percent per year, respectively. Thus, his recommendations are consistent with our alphas.”(p.34) Also, given these numbers, it would seem that Dan Weiner’s recommendations could be consistent with trend extrapolation. In essence, he recommended managed funds that had out-performed over the four years from 2003 to 2006 and advised against Vanguard managed funds that had underperformed during this same period.

Go to Part 2: Vanguard Mutual Fund Investment Newsletter >>>>>>>

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]]> http://www.bestnoloadmutualfund.com/vanguard-managed-and-index-mutual-funds-17.htm/feed Dan Wiener’s Vanguard Mutual Fund Investment Newsletter Promotion http://www.bestnoloadmutualfund.com/dan-wieners-vanguard-mutual-fund-investment-newsletter-promotion-16.htm http://www.bestnoloadmutualfund.com/dan-wieners-vanguard-mutual-fund-investment-newsletter-promotion-16.htm#comments Mon, 26 May 2008 19:50:32 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/dan-wieners-vanguard-mutual-fund-investment-newsletter-promotion-16.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

Dan Wiener’s Vanguard Mutual Fund Investment Newsletter Promotion

<<<<<< Go to Part 1: Vanguard Index Mutual Funds Versus Vanguard Managed Funds

In this second part of this two part article, we:

  • discuss an email promoting a that some of my clients forwarded to me,
  • attempt to understand certain rather exceptional claims for this ,
  • try to reconcile these performance claims with the research paper about Vanguard’s passive and Vanguard’s actively managed that was summarized in Part 1,
  • discuss how performance benchmark selection can affect claims,
  • ask whether Vanguard’s are really for suckers, as Dan Wiener suggests, and
  • question whether Vanguard has an incentive to deceive its customers.

Dan Wiener’s promotional email for his The Independent Adviser for Vanguard Investors

When I first read the Rodriguez and Tower “Do Vanguard’s Managed Funds Beat Its Index Funds?” mutual fund investment research study that was summarized in Part 1, I did not pay very much attention to the few bits about Dan Wiener’s Growth Portfolio. Later, some of my financial planning clients forwarded a recent email newsletter promotional piece from Dan Wiener. The more I read of it, the more intrigued I became. Maybe Dan Wiener had some secret sauce to help my clients beat the market using The Vanguard Group’s and ETFs.

In his email promoting his , Dan Wiener says that he knows the secrets to unlocking hidden riches from Vanguard investment funds. He said that these are secrets that “Vanguard will never reveal.” His promo email was quite hefty, and it took some time to read and analyze. This promo email came from Dan Wiener’s email address, and Dan Wiener signed this email twice.

After I read Dan Wiener’s email, I went back and reread the “Do Vanguard’s Managed Funds Beat Its Index Funds?” mutual fund investment research study by Abel Rodriguez and Edward Tower. Then, I reread Dan Wiener’s sales piece in finer detail.

Please note that everything I have written here comes just from my reading of the Rodriguez-Tower research paper, from Dan Wiener’s email, and from certain related posts on the Bogleheads and Vanguard Diehards forums (see links at the bottom of this article). I have not done any additional or independent analysis. I may lack information, and I could be wrong in my interpretations.

Nevertheless, when someone asks me to buy a financial product or service that will allegedly help me to improve my , I want to understand the underlying facts. I simply expect that written investment product sales documents should have reasonable clarity. In my personal opinion, the Rodriguez-Tower research paper does have reasonable clarity, and Dan Wiener’s email promotion does not.

The aggressive selling of a Vanguard

First, let me summarize the type of email that Dan Wiener sent to my clients and perhaps to many more people. Have you ever found yourself on a colorful and extremely loooooooooooong webpage that pounds an emotionally laden sales message over and over and over from many different angles? That is what this promotional html email from Dan Weiner is like. I printed his email to save myself from a lot of scrolling and to take some written notes. When printed, this email promotion was 16 pages long.

A red border surrounds the promotional copy of Dan Wiener’s email about his . As his sales message progresses, you find that you could get not just 1, but 2, 3, 4, and 5 bonus gift books, if you just sign up NOW! Visions of bonus sets of Ginsu knives filled my head. Ron Popiel might smile about this sales pitch, although the subscription cost of this substantially exceeds the price points of the products that Ronco sold on TV.

Multicolored text in a wide variety of fonts repeatedly urges you to sign up for this . There are no less than 18 hyperlinks and buttons that each will take you to the same ordering page. On that ordering page, you can select a two-year “Best Value” subscription for $189 or a one-year “Great Value” subscription for $99.95.

Now, everybody needs to make a buck somehow. There are families to feed; mortgages to pay; SUVs to fill with $4.00 per gallon gasoline (not me), etc. Furthermore, this kind of very aggressive promotional email may actually be what is really needed to get people to take action and to place an order for one of these . If the long form of this promotional email is what it takes to sell an , then fine. Presumably Dan Wiener uses an opt-in email list and the people he solicits can just delete his message, if they are not interested.

Nevertheless, despite the sales pressure, it seems to me that the content of any promotional email should reasonably and fairly describe the value of the investment product or service being offered. It also seems to me that the quality of such an email promotion for a might also be indicative of the quality of the actual newsletter to which I am so strongly being urged to subscribe.

My clients were confused my Dan Wiener’s pitch. I looked at it to see if I could clear up the confusion. Maybe I did. Maybe I did not. You decide.

Financial nirvana with Vanguard’s versus the Vanguard passive index fund end of days?

Let’s take a look at the content of this promotional email from Dan Wiener. Almost immediately, in the email you are offered a very stark choice, which says “You can a) do nothing and loose 40% of your money in 2008, or b) make 144% more money than the average Vanguard investor.” Aw shucks. Of course, I will take choice “b”. Where can I sign up? With 18 links and buttons for me to get to Dan Weiner’s ordering page, signing up for The Independent Adviser for Vanguard Investors should be a breeze.

However, to say the least, the copyrighting of this aggressive email is not a model of consistency and clarity. Since I have a belief that the accuracy of a ’s promotional email might indicate something about the quality of the itself, I dive in to see if I can figure out this email anyway. Perhaps, things will become crystal clear, as I read more.

The good news is that I already have some information as background. I had already read the “Do Vanguard’s Managed Funds Beat Its Index Funds?” mutual fund study by Rodriguez and Tower, which briefly looked at Dan Wiener’s Growth Portfolio results. (See Part 1 of this two-part article.)

Now, let us look more closely at the claim that you will make 144% more in 2008. Let’s assume that the average Vanguard investor gets a real dollar passive broad market equity index return of maybe 5%. (This might seem a bit low, but let us assume that the US stock market glory days of the 1980s and 1990s are past. In addition, let us keep inflation out to the returns so that my “real dollars” will have constant purchasing power.)

Apparently, by following Dan Wiener’s advice I will make 144% more that 5%, which means about 12.2% annually in real dollar terms. Any sensible investor would salivate over this kind of reliable, long-term stock market return. We are talking about an equity return of over 15% annually with inflation included.

This sounds very good so far. Let’s assume that I can keep getting this extra 144% return year after year. With compounding, after 10 years I will have a portfolio that is about 1.9 times greater than the average Vanguard investor. After 20 years, it would be 3.6 times greater. After 30 years, it would be 6.9 times greater.

With these superior investment returns, all I need is about a $1,400 portfolio, and I will roughly break even on the $100 annual cost of Dan Weiner’s newsletter. With any larger portfolio, Dan Weiner’s great advice will be pure gravy. This sounds like a great bargain. Where can I sign up? Oh, I see the ordering links and buttons. Thank you. Thank you.

What is the source and precision of the out performance of Dan Wiener’s Growth Portfolio?

But, wait. Now, maybe I should not jump into this too fast, although it sounds very, very appealing. I certainly do not want to lose 40% of my money in 2008, and I sure would instead like to make 144% more than the average Vanguard investor. However, I am not sure where either of these “lose 40%” or “make 144% more” numbers comes from, so I keep reading. I will focus on trying to figure out where the “make 144% more” number comes from, because that is the path that I want to take. I wanna be rich. I want my clients to be even richer.

Well, Dan Wiener’s email has a whole bunch of numbers, and he makes a lot of numerical claims. However, these numbers do not always seem to be consistent. Furthermore, his numbers also seem to be inconsistent with The Hulbert Financial Digest data about Dan Weiner’s Growth Portfolio. These Hulbert numbers were discussed at the end of the “Do Vanguard’s Managed Funds Beat Its Index Funds?” mutual fund study by Abel Rodriguez and Edward Tower.

Reading on into this email, however, I do think that I have figured out where the 144% number came from. I could be wrong, because Dan Wiener’s email promo did not come with any explanatory footnotes. However, one of the email’s sidebars makes three statements above a table of numbers, which were: “How Dan’s Vanguard Midas Touch Has Made His Subscribers Rich,” VANGUARD MADE BETTER!,” and ‘You Can Easily Make 144% More Money This Year.” In that sidebar, Dan Wiener’s promo presents two columns of annual numbers starting in 1991 and going through 2007 for a period of 16 years apparently.

The first column is for the “Average Vanguard Investor” who starts with $100,000 and ends up with $409,061 in 2007. The second column is for “Dan’s Growth Model Portfolio” which also starts at $100,000 and ends up at $996,083 in 2007. Just below these numbers it says “% Advantage 144%; Extra Profit: $587,022″ and just below that there is an ordering hyperlink that says: “Members of Dan Wiener’s service are nine times richer than the average Vanguard investor. Join Dan today.”

Now, unfortunately, I am even more confused. The email said that I could make 144% more than the average Vanguard investor in 2008. Yet, instead, that 144% number appears to be a comparison of cumulative assets after 16 years of compounding. Furthermore, the ordering link says that “Members of Dan Wiener’s service are nine times richer than the average Vanguard investor. Join Dan today.” But the text just above says they have 144% more. You might appreciate why I am starting to have some questions about the precision of the numbers in Dan Wiener’s email.

Gosh, if there is a seeming lack of precision in the numbers he promotes, then how can I reasonably expect that there will be a high degree of precision is the development of Dan Weiner’s portfolios and newsletters? Things like this just make me nervous. I prefer precise accounting and detailed performance evaluations.

Maybe it is just me, but there has been too much loosey-goosey accounting going on in the investment world recently. Worldcom, Enron, Tyco, and the others went down or under, and their accounting numbers were not completely transparent. I also remember something about the Beardstown Ladies investment club ten or so years ago. They reported substantial market out performance over the years, and they wrote some best selling books. Unfortunately, upon closer examination it seems that they had some trouble doing proper performance accounting, and they actually trailed the S&P 500 by several percent annually for over a decade.

Investment performance discrepancies between Dan Wiener’s promo and the Rodriguez-Tower “Do Vanguard’s Managed Funds Beat Its Index Funds?” mutual fund study

Be “nine times richer than the average Vanguard Investor” in 16 years? “Make 144% more money than you did in 2007?” Have a 144% “advantage” over Vanguard S&P500 index investors, after 16 years? “Lose 40% of your money in 2008.” Well, Dan Wiener’s email promo has not yet cleared things up for me. Perhaps the Rodriguez-Tower study can help me to understand which of these numerical claims might be correct.

Unfortunately, even less clarity emerges. Using data from The Hulbert Financial Digest the Rodriguez-Tower study concluded that Dan Wiener’s 16 year historical Growth Portfolio results provided an average annual excess return of 2.27%, when benchmarked with the broadest US stock market index. Calculated using average annual returns, the cumulative value of this incremental return over 16 years is in the 40% range plus or minus several percent. (The cumulative comparison would depend somewhat on the baseline growth rate.) (Also, just to remind you, 40% is over 100 percentage points lower than Dan Weiner’s claim of making 144% more. Somewhere between Dan Weiner’s numbers and The Hulbert Financial Digest numbers quoted in the Rodriguez-Tower study, we fell off of a pretty big performance cliff!)

In Part 1 of this two-part article, we accepted the possibility of a 2.27% skill based excess performance for Dan Wiener’s Growth Portfolio, when it was compared to the Wilshire 5000 US stock market index. We did not discuss the perhaps reasonable observation that Dan Wiener’s historical Growth Portfolio results might better be compared to a growth stock benchmark. (The technique of using best-fit benchmarking to discern whether investment results are likely to be due to investment fund manager skill versus variations has become widespread in the investment research literature. Rodriguez and Tower apply this technique in the body of their “Do Vanguard’s Managed Funds Beat Its Index Funds?” investment research paper.)

Benchmark, benchmark, who has an appropriate performance benchmark?

Despite having ignored this potential benchmarking problem thus far, Dan Wiener’s aggressive email pitch for his resurrects this topic. In his email, Dan Wiener goes on for a few pages about how Vanguard apparently mistreats its passive index fund clients. Here are various quotes: “Indexing Is (How Can I Say This Nicely?) for … Suckers. Maybe that’s a bit harsh.” [His words are in red lettering, and this is his punctuation.] “If all but the 50 largest stocks continue to gain over the next 15 years, you’d continue to lose money the whole time.” “Index funds are, once again this year, set to dip, then dive.” These statements are followed by a lot of worrisome statements about high-risk growth stocks, high P/E stocks, index dogs, and so on.

Well, maybe the Wilshire 5000 then is not the appropriate benchmark for analyzing Dan Wiener’s historical performance record after all. Maybe the results should be benchmarked against other growth funds of similar style. Dan Wiener’s email pitch was ambiguous about whether his numerical comparisons were with the S&P 500 or Wilshire 5000 indexes. (My guess is that he was using Vanguard’s S & P 500 index fund.)

In their comparison of Vanguard’s passive and managed , Rodriquez and Tower used a refined best fit statistical technique to determine which of Vanguard’s passive and actively managed were appropriate to compare. This enabled reasonable apples to apples style comparisons. Dan Wiener’s email seems of offer performance comparisons involving apples, oranges, bananas, grapes, kiwis, etc.

In their remarks about Dan Wiener’s Growth Portfolio, Rodriguez and Tower did not apply the same best find benchmarking methodology. They just used numbers from the The Hulbert Financial Digest, which used the Wilshire 5000 as the . Well, the Wilshire 5000 encompasses the S&P500. The S & P 500 captures somewhat more that 70% of total US equity market capitalization and is skewed to include the largest companies in terms of market capitalization. The Wilshire 5000 includes just over 5000 US stocks and encompasses almost 100% of U.S. stock market capitalization measured by trading volume. Neither index is skewed toward a growth investment style. Neither index includes any international equities.

What else might be going on with all these contradictory numbers regarding the historical performance of Dan Wiener’s Growth Portfolio?

After all these claims and this analysis, I have no way of telling whether Dan Weiner really has any “beat-the-market” or “alpha” skill to offer, or whether his newsletter is or is not valuable.

First, what is really an appropriate performance benchmark for Dan Wiener’s Growth Portfolio over 16 years? Has the investment style been consistent or have there been some investment style changes or style drift? If so, have these changes been prescient or not? What Fama-French multifactor model elements might be at play? He calls this his Growth Portfolio. Is it really? What are the large capitalization versus small capitalization implications? What had the US versus International composition been of this ? Has there been any successful or unsuccessful market timing going on? Has there been any successful strategic asset allocation going, i.e. shifting any proportions of the portfolio into and out or cash or fixed income assets in a prescient or not so prescient manner?

Without belaboring the history of investment portfolio theory and the associated academic literature, there is little controversy over the value of . If we assume that one has established a personally risk appropriate allocation between the major financial asset classes of cash, fixed income, and equity securities, we can look at the internal composition of each of these major asset classes separately.

Now, let us look just at the stocks or equities asset class. While the degree of required equities diversification sometime confuses investors, there is a simple rule to follow. The rule is: diversify globally and completely. If one targets a globally diversified personal portfolio that is reasonably proportionate to the market capitalization across the globe, then the composition of your portfolio and the theoretical sweet spot for portfolio mean variance optimization can be expected roughly to coincide.

Frankly, my guess is that all Dan Wiener’s hype about has much more to do about global diversification and little to do about or the generation of excess returns or “alpha.” When appropriately benchmarked, I am guessing that these claims of supposedly superior would just disappear. Despite all Dan Wiener’s claims to the contrary, there is a reasonable possibility that there might be not any here at all. This might all be due to a lack of diversification on the part of S&P500 index investors. Comparing the performance of a globally diversified multi-capitalization portfolio to a much less diversified US large capitalization portfolio might look like , when in fact it is really just a failure to diversify globally.

There are reasonable alternate explanations for this. While I do not have access to composition of Dan Weiner’s Growth Portfolio, there is enough chatter on the Bogleheads and Vanguard Diehards Internet forums to reasonably assume that the Growth Portfolio may have had a reasonably large minority allocation to international equities for an extended period. If this is the case, this might be a diversification issue and have nothing to do with truly in the sense that one more cleverly picks one stock over another or one investment fund over another.

Dan Wiener’s Growth Portfolio could have been much more globally diversified at a time when US stock index investors were staying too close to home and investing too heavily in large capitalization stocks. If so, then that kind of prescience would deserve some respect.

Performance chasing and active management to beat the market is an overly familiar investment sucker’s game. Globally diversifying and getting there earlier than most other US investors is not. Brag about that, and I would be impressed. Select weakly related performance benchmarks to make your look stronger, and brag about that supposed excess performance, and I am not impressed.

Investors spend far too much money, time, and effort chasing performance to beat the market. Instead, they would be far better off getting their investment strategy in order at the outset. Let me repeat what I said at the beginning of Part 1: Use a very low cost, fully passive, and globally !

Marketing to the public — where is the sucker?

To summarize, these are my observations about Dan Wiener claims of performance superiority:

A) If Dan Wiener claims a nine-fold advantage, I am sorry, but one should not compare the current asset value of one portfolio to the asset value of another 16 years ago.

B) If Dan Wiener claims a 144% advantage over a very low cost, passively managed S & P 500 index fund, then his competing investment strategy should have been to pick the best S&P 500 firms and avoiding the dogs. If he could beat the S and P 500 head to head over 16 years, then that is really something that he should be proud of. The SPIVA data shows that the longer active funds try beating the passive S&P500 index the more dismal the record of actively managed S&P 500 becomes. If he claims a 144% advantage without clarifying that he is using an apples to oranges comparison, then this is not so appealing. If he accuses Vanguard of lying over the matter, then this is far less attractive. Since he is not managing his own to produce a 144% advantage, but he apparently is just substituting other Vanguard funds into a portfolio, then it sounds like he is biting the hand that feeds him. In my opinion, that is just rude.

C) If Dan Wiener claims a 16 year 144% performance advantage and then states that two Duke University professors “conclude that my way of investing in Vanguard funds has an 87% probability to continue to outperform for the foreseeable future,” then I seems odd that he does not also mention that that study’s numbers implied a far lesser 16 year “positive alpha “advantage of around 40% or so. Why this 100% percentage point difference? From what I can tell, but cannot be sure of from the confusing information presented in this promo, this may be primarily because the performance comparison was with the S & P 500 versus the Wilshire 5000. Furthermore, he fails to mention that those professors made absolutely no predictive statements. (See below.) Finally, he fails to mention that in footnote 15 Rodriquez and Tower said that any apparent skill level was probably below 87%.

Frankly, this kind of selective marketing of supposedly to sell investment and other financial products and services is practically an epidemic in the financial services industry. (See for example, “How Morningstar Ratings for mutual funds are used as a marketing tool” on The Skilled Investor website.) Most often such promotional claims are simply due to market volatility, randomness, and inappropriate performance benchmark marketing. With Dan Wiener’s email, the exact location of the performance benchmarking bull’s eye still remains elusive.

Does The Vanguard Group keep its mutual fund and ETF investors in the dark? Does Vanguard lie to its customers?

Moving on through this email promo from Dan Wiener, we next are told that all we need to do is to sign up for his newsletter and Dan Wiener will “reveal 19 Vanguard secrets” … “Unfortunately, most Vanguard investors won’t have a say in the matter. Vanguard won’t give them or you the choice. They won’t tell you what to do, no matter how bad things get in 2008.”

Now, I do not have much of a clue about what Dan Wiener is talking about. Is he imposing an advisory obligation on Vanguard? While Vanguard more recently has offered some investment advisory services for a fee, Vanguard is a mutual fund company. Like all the rest of the mutual fund industry, Vanguard offers an array of funds to choose from. It has no obligation to tell you which is best or to tell you what to do. You do that yourself or you hire (hopefully an objective) financial advisor or investment counselor to help you.

In a sense, individual investors are lucky that that Vanguard does not make choices for them, given the mutual fund industry’s history of high costs and performance hyping. Vanguard is one of the few companies that refuses to hype 4-star and 5-star funds and use misleading performance graphs in its advertising. (See the bottom of Part 2 of this article: “How to lie with statistics: Investment performance charts” on The Skilled Investor website.)

I probably will never learn the secrets that Dan Wiener knows and that Vanguard is withholding from me. He really lost me when he had some apparent difficulties with consistent math. When he talks about Vanguard’s secrets, is he talking about Vanguard’s managed funds? Vanguard’s ETFs? Mutual funds that Vanguard closed to new investors due to excessive capital inflows? It is all on Vanguard’s websites. Go look. If you want the opinions of other Vanguard investors, take a look at the Bogleheads Investment Forum and Vanguard Diehards forum.

I understand business, economics, and the capitalist system reasonably well. I do not believe much in financial cabals, although concerns about monopolies and oligopolies seem quite real to me. Self interest drives capitalism. However, in a financial industry that often exhibits borderline marketing and sales practices toward individual investors, over the years I have reached the conclusion that Vanguard is one of the good guys. I also reached the conclusion that John C. Bogle is one of the honest men of the industry. Vanguard is out to make a profit — a reasonable profit. That is much more than I can say about many other parts of the financial services industry. (See: “Have You Given Enough to the Financial Services Industry?” on The Skilled Investor’s Personal Finance Blog.)

While much of the rest of the industry is pushing overly costly investment products, Vanguard developed the low cost index mutual fund market and has added managed funds, ETFs, and a variety of other services. More so than other financial services companies, individual investors have to seek out Vanguard’s products, because Vanguard does not fund massive corps of heavily commissioned “producer employees” and third sales “financial advisor” agents like the retail arms of the investment bank wirehouses, insurance companies, and other financial firms do. Very often, supposedly objective financial advisors and investment counselors will not recommend Vanguard’s fund products, because they can make a great deal more money from you by selling you expensive investment products that are good for them, but bad for you. (See: “Pay less to get more” on The Skilled Investor website.)

So when I read an aggressive email promoting an that can’t seem to do math and benchmark comparisons consistently and that feels it is has to disparage the ethics of a company like Vanguard, well then that kind of newsletter marketing message just falls a bit flat for me. If Dan Wiener truly has some skills, at least I would be far more interested in subscribing to his , if he clearly described how his services were complementary to Vanguard’s and were a valuable addition to the already very valuable offerings provided by Vanguard.

The “Do Vanguard’s Managed Funds Beat Its Index Funds?” research paper - a “liberal” interpretation

Weary reader: I promise that I am near the end of this commentary. However there is one more issue that is worth covering. In addition to disparaging Vanguard’s ethics, Dan Wiener seems to a bit of difficulty accurately describing what the Rodriquez-Tower study said.

Quoting from another sidebar in Dan Wiener’s email, Dan Wiener said: “Dan’s strategy is simple, yet powerfully effective. His deep knowledge of Vanguard, his investigative insights, and his investment results prompted two Duke professors to study his methods … under a microscope.” “The study’s conclusion: The probability that [Wiener’s] Growth portfolio could have outperformed by such a wide margin because of luck rather than skill is only 13.4%”

Well, first I was unable to find any mention from Rodriguez or Tower that they conducted their study due to Dan Wiener’s “deep knowledge of Vanguard, his investigative insights, and his investment results.” I found nothing in the “Do Vanguard’s Managed Funds Beat Its Index Funds?” research paper that credits him. He was not on the credits for this paper that Professor Tower provided in the forum discussions.

The Rodriguez-Tower investment research paper only briefly looked Dan Weiner’s Growth Portfolio record at the end. Rodriguez and Tower undercut this performance claim through their reference to The Hulbert Financial Digest, ratings of his four funds (See footnote #15 in the Rodriguez-Tower paper.) Furthermore, their analysis discredits Dan Wiener’s claim of Vanguard’s bias and favoritism toward its passive index mutual over its managed .

Interestingly, Dan Wiener again seems to treat facts somewhat cavalierly. In the main body of his promotional email text, he says: “Turns out, everyone (except my members and me) is wrong about indexing. The two Duke University professors I referenced earlier conclude that my way of investing in Vanguard funds has an 87% probability to continue to outperform for the foreseeable future.” (Note that the underlining was Dan Wiener’s and not mine.)

Dan Wiener continues, “I already knew this, of course, except for the “87%” figure. I think that number is much higher. Anyway, it’s nice to have a comprehensive study conducted by a major university confirm what members of my service knew the day they joined.”

These statements is stunning to me. Rodriguez and Tower performed a simple statistical test on historical data about the performance record of Dan Weiner’s Growth Porfolio. They made no prediction. Investment studies are always historical and never predictive. The only data available is historical. In general, professors do research, and rarely are they so foolish as to attempt to predict the fundamentally unknowable future. Objective statistical research cannot be predictive, because it simply does not have any data points from the future.

Should I believe Dan Wiener’s predictions or his small print?

To sell his newsletter, Dan Wiener claims in his email that his special strategy has at least and 87% probability of outperforming Vanguard’s into the foreseeable future. He says directly that the real probability is much higher that 87%. Sounds like money in the bank for his subscribers.

To make this claim, which he underlines in his aggressive email promotional text, Dan Wiener dons the endorsement mantle of two Duke University professors. However, in reality, these professors have undercut his claims, and they have provided no endorsements. Dan Wiener blithely converts what is simply an historical research statistic into a prediction which is supported by Duke University professors. Then, he claims even greater skill than the historical statistics that were reported. Dan Wiener ignores The Hulbert Financial Digest, data completely.

With such an endorsement from Duke University professors and with Dan Wieners prediction that he is almost certain to outperform Vanguards , then maybe I will change my mind and sign up for Dan Wiener’s mutual fund . Therefore, I again click on one of his plentiful ordering links and buttons to get to the ordering page.

As you already understand from this article, I can be a cautious sort of fellow. Therefore, I decide to read the entire ordering page in detail before ordering. At the bottom the order sheet, the small print says “This is a solicitation for The Independent Adviser for Vanguard Investors, a monthly general interest newsletter which is not liable for the suitability or future of any securities or strategies discussed. Historical investment return examples given are hypothetical, and not to be taken as representative of any individual’s actual trading experience.”

WTF??? Why does the legal small print say quite the opposite of Dan Wiener’s email promo? He says he thinks that his success rate will be “much higher” than the 87% probability of future success that was supposedly bestowed by these two Duke University professors. Which of these two choices should I believe?

Well, I guess that am going to keep my $100. If Dan Wiener a) cannot seem to offer consistent numbers, b) feels the need to bite Vanguard’s hand rather than stand solely on his own merits, c) does not seem to interpret carefully an investment research study that mentions him, and d) contradicts his own performance projections, then maybe I am not really interested in knowing what is inside of his after all.

Also, I have decided that will also keep my respect for Vanguard. In addition, I will also keep my respect for disciplined academic investment research. It seems to me that I can find a wealth of objectivity about investing in the academic research literature. However, whenever someone in the financial services industry stands to earn a buck off of me or my clients, the facts often very quickly begin to lose their sharpness. The quality of investment information is often very low when it comes from a source that is simultaneously reaching into my wallet or into the wallets of my financial planning clients.

<<<<<< Go to Part 1: Vanguard Index Mutual Funds Versus Vanguard Managed Funds

Bogleheads and Vanguard Diehards forum discussions about Dan Wiener’s

By the way, if you want to read some forum discussions about Dan Wiener’s , here are some links:

Copyright Best No Load Funds

Tags: index funds, mutual fund research, best no load funds, finance newsletter, growth portfolio, financial digest, investing newsletters, mutual funds, No Load Funds, managed investment funds
]]> http://www.bestnoloadmutualfund.com/dan-wieners-vanguard-mutual-fund-investment-newsletter-promotion-16.htm/feed 7 Ways to Pick the Best Noload Mutual Funds and ETFs http://www.bestnoloadmutualfund.com/the-best-noload-mutual-funds-etfs-13.htm http://www.bestnoloadmutualfund.com/the-best-noload-mutual-funds-etfs-13.htm#comments Tue, 11 Mar 2008 02:37:46 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/the-best-noload-mutual-funds-etfs-13.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

7 Ways to Pick the Best Noload Mutual Funds and ETFs

Scientific Criteria for Selecting Top No Load Mutual Funds and the Best Mutual Funds and ETFs

People simply want to invest in what they hope will be the top no load and the best noload and exchange traded funds (ETFs). They want selection criteria that can lead to a higher probability of doing better in the future on both a sustained and risk-adjusted basis.

With real lives to lead, people who are not professional investors just want an efficient, but effective fund identification process. They want to pick the best mutual funds and ETFs that will make their investment assets work for them. They do not want to have to “work for” their assets by spending large amounts of time monitoring and repeatedly changing from one mutual fund or exchange-traded fund to another.

Millions of individual investors run futile hamster wheel races pursuing the illusion that the superior past performance of funds and individual securities will lead to superior future performance. The Pasadena Financial Planner has written these articles for those of you who want to stop “chasing your personal finance tail” and get on with your real life. Of course, it is difficult to stop running in a personal hamster wheel, unless you are convinced that there is better approach that you can implement yourself with relative ease. This article and this website should be good news to you, because it provides a better way for you to find the top no load and the best and ETFs.

Low Cost No Load Index Funds and ETFs Simply are Better

Taken as a whole, the vast body of investment research studies show that there really are better approaches to buying and owning and ETFs. You do not need to frantically chase fund performance. Performance chasing simply does not work.

The vast majority of individuals who chase fund performance get results that are far worse than a passive approach. Better performance tends to come to those individual investors who calm down and try to understand what has actually been demonstrated to work in the investment research literature.

Below we introduce seven articles on selection criteria can lead you to the and ETFs to hold for the very long term. In particular, note that you should use the first six selection criteria first. Only then should you look more closely at a fund’s past performance — and then only for the purpose of eliminating the worst historical performers. Read these seven articles for all the details!

In addition, if you want to use these 7 selection criteria to find the top no load and the best noload and ETFs on your own, you need some automated tools. Free ETF and mutual and free mutual fund databases would be a good thing. To find the best and ETFs, of course, you also need access to automated fund screening applications that have accurate and up-to-date data sets. The Pasadena Financial Planner has also written about screening applications that you can use free on the web. Click the Sitemap to find these articles.

The Best Mutual Fund Selection Problem — Solved for Individual Investors

This “Best No Load Mutual Funds” website provides two very key parts of the mutual fund and ETF selection puzzle for individual investors! The 7 scientifically based selection criteria introduced below provide rational fund screening rules.

These 7 screening criteria and the information provided on this website about free online investment can help you to winnow down the tens of thousands of available investment funds. As a result, you can reduce the selection problem down to a much more manageable number of funds for you to evaluate more carefully prior to investing. You do not have to pay high fees to an expensive financial advisor who will tell you to pick expensive funds with better performance that most often will turn out to be mediocre or worse in the long term.

Read the summaries below, and then click on the links for more information about these 7 scientific no load mutual fund and ETF selection criteria.

1) The Best Mutual Funds Have NO Sales Loads and NO 12b-1 Fees

The great majority of investors buy funds through advisors and pay a very, very high price over their lives for doing so. You simply do not need to pay hefty sales commissions (loads and higher annual expense ratios) to financial advisers who will only offer to you those funds that will pay them these hefty sales commissions.

When you pay someone’s sales commission who only tells you about expensive , you shoot yourself in both feet. First, you pay for inferior inferior advice. Second, you end up living with fund expenses that kill a substantial portion of the growth of your personal investment portfolio.

All mutual fund sales commissions and marketing fees can be avoided entirely by buying from the many mutual fund families that will sell fund shares directly to the public without such fees. ETFs will inevitably involve brokerage commissions, so always use discount brokers. Then, do not trade ETFs. Instead, sit tight with a very long-term buy-and-hold strategy to amortize these exchange-traded fund trading costs.

This investment fund selection criterion is very simple. Zero is the maximum amount of front-end load and back-end load fees that you should to pay. Zero is the maximum marketing or 12b-1 fee you should pay. Just say no.

2) The Best No Load Mutual Funds Have VERY LOW Management Expenses

Lower investment management fees are better. Lowest is best, and the lowest means passively managed index and ETFs. Since there are numerous funds with annual expense ratios below .25%, look there first.

The higher the annual fund expense ratio the more you should question why you should pay such higher expenses. Paying more tends to lead to inferior rather than net of you overall investment costs and capital gains taxes.

3) The Best Noload Mutual Funds Have VERY LOW Portfolio Turnover

Lower portfolio turnover is better. Higher turnover increases hidden fund transactions costs, which tend not to be recouped through better performance. Look for single-digit and very low double-digit annual portfolio turnover rates in the no load and ETFs that you purchase.

4) Avoid Large Actively Managed Mutual Funds

When they trade their overly large portfolio positions, large actively managed funds tend to affect securities market prices negatively. This can only drag down their net fund performance. The more they trade, the worse it tends to get. High trading costs suck value out of the mutual fund portfolio, and these costs are on top of the management fees that you pay directly.

High turnover by large funds should be a big red flag to you. If you avoid actively managed funds altogether, then your concerns about excessive fund size can be greatly reduced. Very large need to manage their trading impact, but their turnover is far lower than actively managed funds.

5) Choose Mature Mutual Funds

The ETF and mutual fund industry throws a whole lot of new fund spaghetti on the wall to see what will stick. IF a new fund has a lucky streak, individual investor assets and “advised” assets come running their way. This is new fund success — at least success for the fund company.

However, when you invest in a very new fund, and it fails to grow, the fund is very likely to die or to be eaten. Rarely do lousy young and ETFs fold and refund money. Why confess incompetence and give back assets that could still yield fees?

When new funds do no attract enough assets, these “failed” funds (and your invested and diminished assets) most often will get merged into other funds. Unfortunately, new failed funds tend to get merged into larger funds with noticeably inferior historical performance.

Fund companies do not want to take any of the luster off the of their currently hot funds. Therefore, your money gets tossed into a bigger dog or just average fund. To avoid participating in this frenetic new fund infanticide process, only pick funds that have been in business for at least a few years.

Three years is probably enough. Mutual funds are like dogs in some respects. They grow up in just a few years. However, if they get caught in traffic at the wrong time on “The Street,” they may get run over or be eaten by a bigger dog.

6) Avoid Very Small Mutual Funds

Small funds cannot operate efficiently. They need a minimum critical mass of assets to fund required management expenses. Simply avoid very small funds. One or two hundred million dollars is probably the minimum. A higher minimum would also be fine, since there are still many larger funds to choose from that would meet these other criteria.

7) Screen Out Inferior Mutual Fund Performance

Evaluate the historical of and ETFs, but only AFTER using other screening criteria. Superior or average past fund performance tells you ABSOLUTELY NOTHING about how a fund will perform in the future. Pay attention to the fine print in the prospectus that says that past performance does not indicate future performance, because this has been shown to be true.

Ignore all the fund industry’s selective marketing of only their past winners. Individuals need to move beyond their naive and flawed notions about historical .

Modern, highly competitive, and real-time securities markets are auction price setting mechanisms that force the mass of smart and not-so-smart professional and amateur investors to accept largely average returns over time. Only very poor past performance tends to indicate potentially sub-par performance in the future, and that is probably due to higher costs. Therefore, eliminate only the worst of historical performance during fund screening and choose from the remainder — despite whether a fund has had superior, average, or even somewhat below average performance in the past.

Net of costs, four and five star funds are no better than three star funds and probably no better than even two star funds. Eliminate the bottom one-tenth to one-third of funds on a historical performance basis and choose from the remaining nine-tenths to two-thirds without stressing their past performance. Instead, choose no load with very low costs and turnover.

Passive, low cost, noload index usually have higher risk adjusted performance

If you evaluate the investment research literature, you will find that buying passive, low cost, noload index and ETFs are far more likely to lead to higher risk adjusted over the long run. You can help to break the cycle of frequent fund buying and selling. You can get off the performance chasing hampster wheel that the securities industry wants you to keep running on for your entire life.

Securities sales people and financial advisors get paid more, when you pay more. That is why they shamelessly tell you that you must “pay more to get better performance.” This is complete rubbish. The investment research literature says the opposite. Pay less and get more.

Push the button — get some cheese. Tell naive investors to pay more — get some expensive cheese and some big bonuses. That is why rats and financial sales people keep hitting their buttons. When rats push the button, they get cheese. When financial salesmen push the button, they get paid very well.

Unfortunately, you end up being the one who pays them. If they really understand the investment research literature — and most securities sales people do not — then they just hope that you will never figure it out. Or, you might not realize the problem until years later, when your personal investment portfolio is much smaller than it could have been.

However, if you have already figured out the problem, then these 7 selection criteria offer you a better solution and a relatively easy way to pick the top no load and the best and ETFs. Become a proactive and extremely cost-conscious consumer of financial and investment products today!

Tags: mutual funds, No Load Funds, stock mutual funds, best no load funds, bond mutual funds, top no load mutual funds, no load index funds, noload funds, fund screening tools, index funds
]]> http://www.bestnoloadmutualfund.com/the-best-noload-mutual-funds-etfs-13.htm/feed The Best No Load Mutual Funds and ETFs http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-etfs-12.htm http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-etfs-12.htm#comments Mon, 10 Mar 2008 18:49:12 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-etfs-12.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

The Best No Load Mutual Funds and ETFs

How to Select the Top No Load Mutual Funds and ETFs

Given the extremely large number and variety of stock - equity, bond - fixed income, and equity and ETFs, investors need a rational basis to select among them. For example, there are over 60,000 different mutual fund investment share classes sold worldwide. Some and ETFs must be better than others, but which ones are they? How can you tell before the fact?

Without scientific selection criteria and a good understanding of which factors are more or less likely to increase your long-term risk-adjusted investment returns, you will make erroneous decisions based on false assumptions. The most obvious mistake that individuals make is to extrapolate past performance into the future. Superior past performance has simply not been shown to be a reliable predictor of superior future performance.

Low Costs Lead You to the Best No Load Fund

Financial industry sales people and investment advisors promote high cost with superior past performance, because they are easier to sell to naive investors. Furthermore, most investment advisors and financial sales people themselves do not know any better. The financial services companies that they work for do not teach them about the findings of the investment research literature.

Instead, they teach their “financial advisors” how to sell investment products quickly — whether or not these investments really are the best and ETFs from the point-of-view of their clients. The cycle of performance chasing goes on endlessly. In the process, it damages the long-term financial success of millions upon millions of individual investors around the world.

Mutual fund sales loads and 12b-1 marketing fees reduce your long-term . These investment sales commissions dramatically reduce the size of your long-term investment portfolio. The true costs of mutual fund sales loads and mutual fund are far larger that most investors understand. Furthermore, financial advisors and commissioned securities sales people almost always promote and ETFs that are more expensive. You pay more to buy these funds and you pay more in the long run, because with sales loads and are more likely to come up short in comparison with low cost no load .

Buy Low Cost No Load Mutual Funds and Hold Them for Years

Investors want to select the best bond and equity and ETFs to hold for a long duration. Most would also like to invest additional amounts automatically into these funds over time without worrying about whether they do or do not own the best available. Most individual investors do not want to spend their precious personal time constantly figuring out which other to switch to. (Note that a minority of investors very actively and repeatedly switch between . Dalbar’s studies have show that the long-term performance of frequent switchers is simply terrible, when compared to long-term buy-and-hold investors.)

Also, buy-and-hold mutual fund and ETF investors usually are much less concerned about short-term fluctuations than they are about achieving their longer-term investment capital appreciation goals. Such investors want to use mutual screening or selection criteria to identify the best and to minimize the need for frequent changes due to inferior . Individual investors are better served, if they understand what the scientific investment literature says about potential selection criteria. Therefore, a series of articles the Pasadena Financial Planner discusses fund selection criteria that have a firm basis in scientific investing. Click on the Sitemap link to find them.

Tags: bond mutual funds, best no load mutual funds, best no load funds, stock mutual funds, top no load mutual funds, mutual fund performance, index funds, noload funds, No Load Funds, mutual funds
]]> http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-etfs-12.htm/feed Avoid Very Small Mutual Funds and ETFs http://www.bestnoloadmutualfund.com/avoid-very-small-mutual-funds-11.htm http://www.bestnoloadmutualfund.com/avoid-very-small-mutual-funds-11.htm#comments Mon, 10 Mar 2008 18:48:33 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/avoid-very-small-mutual-funds-11.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

Avoid Very Small Mutual Funds and ETFs

If you are going to invest in actively managed , then these funds need to have a sufficiently large asset base to fund the necessary and analysis.

If an active fund is too small, then fund , analysis, and management quality can suffer or fees could grow. Passively managed and ETFs do not have the significant overhead that actively managed have associated with personnel to evaluate investment alternatives.

Because of their much lower analytical costs, the minimum size of passively managed and ETFs can be far less of an issue, when compared with an . Nevertheless, both actively managed and passively managed have to cover their marketing, sales, legal, customer service, and other costs - many of which will benefit from the financial economies of scale related to the amount of assets under management.

To amortize the that is necessary to manage properly a mutual fund or ETF each year, a minimum total asset base is required.

To illustrate, an actively managed $100M stock mutual fund with a 1% yields $1 million annually for , analytic expenses, and other fund management costs. In the grand scheme of what it takes to run actively managed each year, $1M is just not a lot of money. Therefore, it would be reasonable for you to set your minimum asset selection criteria at several hundred million dollars or even higher for any diversified investment fund — particularly those that are actively managed .

If the maximum you are willing to pay each year is lower than 1%, then the required asset base would need to be proportionately higher. If the expenses of a particular “style” of active fund, such as emerging markets stocks, tend to be significantly higher, then you would want an even larger asset base over which to spread and other portfolio management costs.

While the investment research literature indicates that passive index mutual fund strategies lead to better net performance on average, The Pasadena Financial Planner does not expect that actively managed will disappear. Therefore, if you still are going to invest in any investment fund and particularly actively managed funds, then you should want them to have a sufficiently large asset base to fund the necessary research and pay all other administrative costs. If a fund is too small, then fund management quality could suffer and/or fees will increase.

However with actively managed , the problem is not that there is no “gross” value added. On average, fund management professionals make a modest positive contribution before their expenses. They may be doing so at the expense of amateurs who are poor portfolio self-managers.

One major problem with active professional is that, on average, they charge substantially more than they return in improved performance.

The average active team does not make a sufficiently great incremental performance contribution to overcome their more substantial added costs. Furthermore, there is no reliable way to tell future winners versus losers from among all active professional mutual fund managers. Therefore, in “net” rather than “gross” terms for individual investor portfolios, it is far more likely for active managers to trail rather than exceed a passive market index return.

There are significant differences in costs between actively managed and passively managed . By not attempting to beat the market, which most often will meet with failure, no load can dramatically reduce costs and taxes and improve the odds of better net returns. While there are some areas of specialized expertise in index fund management, properly managing an index mutual fund depends largely on having a very efficient trading operation to track the index and an efficient customer service operation.

No load and ETFs do not have the significant overhead that actively managed do associated with , and therefore, the need for expensive analysts is greatly reduced.

Because of their much lower costs, the minimum size of a is less of an issue than it is with actively managed . Nevertheless, individual investors still need to be concerned about that are too small.

With no load , The Pasadena Financial Planner suggests that you screen for no load using the maximum that you will personally willing to tolerate. If no load are run efficiently, then their management expense ratios should be very, very low. While there are some ridiculous examples of domestic no load with management expense ratios over 1% annually, even a .25% upper screening limit will give you a wide range of no load from which to choose.

Finally, note also that newly created, actively managed and passively managed funds that are spawned within a larger fund family may benefit for a time from both the fund family’s economies of scale and its subsidies of the . Administrative economies of scale can permit new funds with smaller asset sizes to exist for a longer period.

Very often, fund families will substantially subsidize the of their newer funds. This temporarily reduction of the can have the effect of increasing short-term performance. However, if a new fund does not grow quickly, then it is likely to be shut down or merged into another inferior performing and/or more risky fund within that fund family. Therefore, you should choose mature noload mutual funds instead.

Tags: no load mutual funds, bond mutual funds, index funds, stock mutual funds, management expense ratio, mutual fund management, mutual funds, actively managed mutual funds, best no load mutual funds, best no load funds
]]> http://www.bestnoloadmutualfund.com/avoid-very-small-mutual-funds-11.htm/feed Choose Mature Noload Mutual Funds http://www.bestnoloadmutualfund.com/choose-mature-mutual-funds-10.htm http://www.bestnoloadmutualfund.com/choose-mature-mutual-funds-10.htm#comments Mon, 10 Mar 2008 18:47:31 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/choose-mature-mutual-funds-10.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

Choose Mature Noload Mutual Funds

Investing in more mature and exchanged-traded funds (ETFs) allows you to evaluate the historical consistency of a fund’s record.

On average, the future portfolio returns of more mature funds are probably no more predictable than for very young funds with a similar style or strategy. However, the record of accomplishment of a more mature fund can provide more confidence in its commitment to its strategy and in its ability to remain in business. While there is no guarantee that an older fund will not fail, you have a better chance to avoid involuntary participation in the frenetic birth and death process of many infant .

Very young simply lack records of accomplishment. Therefore, very young are more likely to put you into the position of being an experimental guinea pig of and the ETF industry. Concerning screening criteria, simply set a minimum age for and ETFs that you are willing to have in your investment portfolio. Three years should be adequate, and there is probably no reason to have a higher minimum. The point is simply to avoid allowing ETF and to experiment with your money. Choose low cost noload that have been around for at least three years.

The is clever and tries very hard to attract your and ETF dollars.

For example, data from Lipper, Inc. indicated that 1,460 new were started in 2003, 2,309 in 2002, and 2,392 in 2001.1 The actual number of truly new and distinct funds is smaller, because Lipper counts different share classes as separate funds.

Differences between share classes have nothing to do with the management of a fund’s portfolio. Instead, these share class differences are due to the structure of the sales compensation paid to the investment counselor or financial advisor who convinces you to invest in . Different share classes simply assess higher or lower front-end and back-end sales load charges and higher or lower annual expense ratios.

Mutual fund companies and ETF companies might argue that they are trying to offer innovative new to meet evolving investor demands.

This answer is largely rubbish. Mutual fund companies and ETF companies are trying to get your assets into their funds. A true innovation motive is quite unlikely, because tens of thousands of funds of all types already exist worldwide. For example, there are almost as many different US domestic , as there were U.S. publicly traded companies (This counts only U.S. firms that are traded on public exchanges and excludes over the counter (OTC) penny stocks.)

A more cynical view of this frenetic fund birthing process is that and ETF companies recognize that fund performance is much more a matter of luck than skill. If fund families keep forming new funds, then some of these new funds will perform better by chance than the average fund within the particular investment style category.

The large number of new funds launched annually indicates that barriers to entry are very low. Fund families can launch a new fund and use their existing operations to support the new fund. If early fund returns happen to exceed its benchmark, then the fund family has a new fund to sell with a short but apparently record.

Small new with stellar records attract investor assets

Sometimes, new fund managers will get lucky by taking positions in smaller firms with more volatile stock prices, or they may pick some larger capitalization firms whose stocks might appreciate dramatically in the short run. The very short, but apparently stellar, record of accomplishment of some new funds makes it much easier to attract investors. These funds can live to see other days, if new assets flow in fast enough.

You should pay close attention the expense ratios of a very young fund and the expense-related footnotes in its prospectus. It is common for fund families to subsidize the management expenses of new funds for a time. By keeping the down, the funds can temporarily inflate performance.

If the fund’s securities selection is lucky, then more investors may come running. If the asset base grows quickly enough then could enable the new fund to grow its management expenses without increasing its annual .

However, if a mutual fund is not so lucky, its standalone management expenses will not disappear. Fund families do not want to subsidize costs of their small, languishing funds for an extended period, and the pressure will be on for the fund to “stand on its own.” Therefore, you need to watch for upward creep in the of a very young fund over time. Note also that the higher a fund’s expenses, the more likely it is that the fund’s net returns will fall short, when compared to a passive market index benchmark.

The new mutual fund grindhouse: Toss ‘em out — Chew ‘em up

In the Warner Brothers movie 300, the Spartans tossed to their deaths those babies whom they deemed to be inferior. Mutual fund companies also are Spartan in this respect. Unfortunately, most do not extend this Spartan mentality to the management expense ratios that they charge investors across all their funds.

A new mutual fund that does poorly will often be put out of its misery, although this mortality process will do nothing for the misery of the mutual fund’s investors. Most of these under performing fund dogs (or puppies) either will be shut down or will be merged into larger funds. For example, “according to data from Lipper Inc. 870 U.S. were merged into other funds (in 2003), while 464 were liquidated. The pace is similar to 839 mergers and 555 liquidations in 2002, and 956 mergers and 433 liquidations in 2001.”2

As noted previously in this article, 1430 were created in 2003. When 2003’s 870 mergers and 464 liquidations are combined with these new funds, then the net number of new was just 96! Fund financial innovation certainly seems like an awfully harsh process, through which many investors find themselves being dragged. The cynic would say that the mutual fund industry’s rapid birth and infanticide cycle simply allows some of the fund industry’s inferior performance history to be swept under the carpet and obscured or erased.

Mutual fund companies tend to merge new, under performing into their inferior mature

Furthermore, to the chagrin of participating investors, when unsuccessful young are merged, there also is evidence that the older — into which these young, failed funds tend to be merged — will usually have inferior characteristics from the investor’s perspective. The larger and older existing funds into which new and unsuccessful funds are merged have a higher tendency to be both more risky and poorer performing than the average mutual fund.3

Apparently, many do not want to lose the assets that they already have captured in their inferior new funds by liquidating them and issuing refunds. However, at the same time, they also appear not to want to merge these failed young funds with their more successful older funds and thereby drag down the performance history of these more successful older funds. Instead, they usually merge their sick puppies with their older dogs, which are large enough to stay alive within the cost structure of the .

1) Hayashi, Yuka. “More Mutual Funds are Disappearing Despite Market Recovery.” Dow Jones Newswires. February 26, 2004.
2) ibid
3) Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake. “Survivorship Bias and Mutual Fund Performance.” Review of Financial Studies, Winter 1996, Vol. 9, No. 4: pp 1097-1120

Tags: best no load funds, noload funds, management expense ratio, bond mutual funds, stock mutual funds, best no load mutual funds, investment mutual fund, stock and bond mutual funds, mutual fund companies, financial securities industry
]]> http://www.bestnoloadmutualfund.com/choose-mature-mutual-funds-10.htm/feed The Best Mutual Funds Have NO Sales Loads and NO 12b-1 Fees http://www.bestnoloadmutualfund.com/best-mutual-funds-have-no-sales-loads-9.htm http://www.bestnoloadmutualfund.com/best-mutual-funds-have-no-sales-loads-9.htm#comments Mon, 10 Mar 2008 18:44:32 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/best-mutual-funds-have-no-sales-loads-9.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

The Best Mutual Funds Have NO Sales Loads and NO 12b-1 Fees

Sales loads and other just pay financial advisors to recommend more expensive and ETFs

There is no good evidence that investment sales loads and other 12b-1 sales fees charged to investors result in higher mutual fund and ETF performance. In fact, the opposite has repeatedly been shown to be true.

Mutual funds have a long performance history to evaluate. Investment research shows that brokers and financial advisers do not pick better funds. Instead, they try to sell you the more expensive funds that they are paid to promote. By promoting more expensive funds, these higher fees actually reduce performance. Paying a load just means that you are throwing your hard-earned money down a hole.

Front-end and back-end loads, , and other sales compensation charges only ensure that an advisor and his/her advisory firm will be compensated for guiding you to select funds that will pay these fees. Front end sales loads reduce the amount that will be invested in the fund on your behalf. You will have less money invested and fewer assets upon which to earn a return.

Back end sales loads allow funds to take away a share of your future returns. Funds with front-end and back-end loads also tend to charge higher annual fees. Marketing fees sometimes known as are additional periodic sales charges that further reduce your ongoing returns. Assessed over time, pay a sales agent for periodic “servicing.”

Front end sales loads, back end sales load, and 12b1 charges pay advisers. They are not used to improve ETF and mutual fund .

There is zero connection between the management of the fund and the extra , , higher management expenses, and 12b-1 marketing fees that you pay, when you buy through a financial counselor. There is absolutely no reason to believe that the fund will perform any better to compensate for these charges.

Because securities markets are generally efficient, is largely due to luck rather than skill and tends not to persist. On average across funds, front end and are a dead weight loss to you due to market efficiency and the fact that the loads you pay are not even applied toward improving performance.

All a front-end sales load or back-end sales load will guarantee is that there will be a paid sales person to tell you that the fund that they are trying to get you to purchase is a “better” fund. While advisors will most often be careful to avoid making specific promises about future performance, they will not hesitate to provide materials that suggest that the fund has had superior past performance and perhaps a 4-star or 5-star Morningstar Rating.

This game is easy to play, because only those and ETFs with past “superior” performance will be promoted by the commissioned financial advisor. Other less expensive and no load will be conveniently ignored. When stops in the future, then new “better” funds will be promoted instead. Past “better” funds that do not turn out to be better will be shelved. The securities industry has been playing this superior shell game for decades. Unfortunately, you get stuck with mediocre future performance and higher investment costs.

When choosing , eliminate ALL front end and back end loaded from consideration.

There are thousands of fine no-load funds available. Ignore the sales pressure of any financial counselor or investment advisor who pushes with loads, marketing charges, and higher expenses. You can buy noload directly from no load mutual fund families. You can buy exchange traded funds through discount brokers and then hold them for a very long term to amortized your trading costs.

Note that certain very limited back-end loads can sometimes be beneficial to you, but only if they expire quickly and are designed to prevent costly active trading in and out of the fund by other investors who exploit buy and hold investors. Accept short duration back-end redemption fees that are unlikely to affect you (months and not years). Also, you should be reasonably certain that you can stay invested in the fund long enough for the redemption penalty period to expire.

Do not accept back end load charges. These back end charges should not be paid to an investment adviser or to the fund promoter. Instead, these back end charges should be in the form of a redemption fee that is paid only to the shareholders who remain in the mutual fund. Before buying, ensure that all redemption proceeds from early-exit investors will be returned the fund’s investment pool for the benefit of its longer-term shareholders.

Do not pay brokerage account wrap-fees that are charged by retail “full-service” stock brokers.

It is unnecessary to pay wrap fees to purchase good no load and and low fee ETFs. Buy-and-hold individual investors do not have to pay high (or any) percent of assets wrap account fees to buy and hold and ETFs. Buy them yourself directly and avoid wrap accounts that bleed your personal investment portfolio year after year after year.

If you have sufficient personal initiative to research low cost index mutual fund alternatives, then you can get a very large extra financial payoff by purchasing directly from the mutual fund. Investing directly in funds that you select yourself is very straightforward. It really does not take much time and your “hourly wage” for buying low cost index and ETFs is huge.

All mutual fund families that allow direct investments have toll free customer service telephone numbers to request forms to be sent through the mail. Telephone representatives will tell you how to invest. No load funds dealing directly with the public also have easily downloadable and printable forms on their websites.

Filling out and mailing in these noload fund investment forms is only mildly tedious. However, when you do it yourself and you do not pay a commission to purchase through an investment advisor, you pay yourself a very high hourly wage for this relatively quick and painless process of purchasing directly from the mutual fund.

Exchange-traded funds are very easy to acquire, but just hold your ETFs and do not trade frequently.

Just use a discount broker to keep your transaction costs down. Furthermore, to amortize these brokerage transactions costs only buy broadly diversified, very low fee, index ETFs that you intend to hold for a long time. While somewhat different, ETFs and share many similar characteristics.

However, one disturbing trend with ETFs has been the far more frequent trading of ETFs, which drives up your trading costs and your short term capital gains taxes and long term capital gains taxes unnecessarily. Do not get caught up on trading ETFs. Buy the broadest market index exchanged traded funds and just hold on to them. Do not trade. Brokers want to trade ETFs to drive up commissions. Just say no and sit tight. Passive buy and hold investors are far more likely to do better in the long run compared to active investors who chase the latest hot investment sector.

Tags: mutual funds, back end sales loads, index funds, bond mutual funds, best no load funds, 12b1 fees, 12b-1 fees, stock mutual funds, No Load Funds, noload funds
]]> http://www.bestnoloadmutualfund.com/best-mutual-funds-have-no-sales-loads-9.htm/feed The Best Noload Mutual Funds Have VERY LOW Portfolio Turnover http://www.bestnoloadmutualfund.com/best-noload-mutual-funds-have-low-turnover-8.htm http://www.bestnoloadmutualfund.com/best-noload-mutual-funds-have-low-turnover-8.htm#comments Mon, 10 Mar 2008 18:41:40 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/best-noload-mutual-funds-have-low-turnover-8.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

The Best Noload Mutual Funds Have VERY LOW Portfolio Turnover

Higher means higher , which reduce .

Short-term is a zero sum game played against other very well informed mutual fund traders and other securities market traders. On average, higher is far more likely to result in lower — instead of superior risk-adjusted performance.

Higher indicates that management is very active in buying and selling. Higher indicates a shorter-term strategy to pursue supposedly superior returns. The investment fund manager hopes that his or her short-term speculative insights will allow the fund to beat others in the highly competitive securities markets.

Most often, however, the very active investment fund manager will be wrong about the supposed virtues of more frequent trading. When securities trading volume is greater, then even higher is required just to break-even on the associated incremental .

The primary impact of excess turnover is to drive up trading costs, which tend not to be visible to individual investors. Such trading costs include brokerage commissions, the bid/ask spread, and the market impact, if causes the bid-ask spread to move temporarily to absorb higher trading volume.

The ratio serves as a visible proxy to measure the more hidden of actively managed .

Such are not detailed in the information that is easily available to mutual fund investors. Trading costs are not paid out of the of the mutual fund, but instead directly reduce the reported and net asset value of the fund’s securities portfolio.

When compared to funds of a similar style, a fund’s turnover ratio gives a good indication of fund activism. Investment research studies have demonstrated that lower turnover is better.

Certain fund management styles will be characterized by low turnover, such as noload that track passive indexes. Certain fund management styles, such as aggressive growth equity or , will have far higher . Unfortunately, the investment research literature does not demonstrate that higher turnover leads to better performance.

In fact, the opposite is true. The great majority of actively managed funds with high turnover do not demonstrate better results, after the additional trading costs are taken into consideration. Furthermore, no reliable way has been shown to identify beforehand the minority of higher turnover funds that will eventually do better. You are far more likely to pick from the majority of higher turnover funds that will do worse — sometimes much worse — because of their added costs.

When you select noload , look for funds with the lowest turnover. Very low turnover funds are much more likely to provide superior .

The reason is simple. Low turnover noload avoid the additional drag of higher .

The automated application that you use to screen should allow you to screen for portfolio turnover. Turnover will usually be calculated as a percentage of the fund’s average portfolio value on an annual basis. Annual percentage turnover could range from a very minor part of 100% to a number that is many times 100%.

For points of reference, Morningstar provides statistics for major types of funds. Morningstar data indicates that actively managed domestic have average turnover of about 100%. Average turnover percentages are similar for international stock funds.

Taxable bond funds had average turnover around 150%. Of course, bond can vary significantly due to the average duration of the bonds within the fund. Municipal bond funds typically have much lower turnover of around 25% per year. Over time, these averages for actively managed funds may shift.

In contrast, passively managed, stock index noload have far lower turnover and therefore far lower trading costs. The best noload stock will have single digit annual percentage turnover ratios or at least very low double digit percentages.

Concerning bond market index funds, these usually are passively managed noload holding fixed income securities. Noload bond funds will have turnover that also varies, because of the average duration of the bonds in the fund. Nevertheless, noload bond should almost always have lower turnover, when compared to more actively managed bond .

Tags: best no load funds, mutual fund turnover, stock mutual funds, securities trading costs, noload funds, bond mutual funds, noload mutual funds, mutual fund trading, index funds, mutual funds
]]> http://www.bestnoloadmutualfund.com/best-noload-mutual-funds-have-low-turnover-8.htm/feed The Best No Load Mutual Funds Have VERY LOW Investment Management Expenses http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-have-low-management-expenses-7.htm http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-have-low-management-expenses-7.htm#comments Mon, 10 Mar 2008 18:40:24 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-have-low-management-expenses-7.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

The Best No Load Mutual Funds Have VERY LOW Investment Management Expenses

A high ETF or mutual fund can only be justified, if an investment fund earns even higher net returns that compensate for these higher expenses.

Sadly, this is most often NOT the case with costly actively managed equity and bond and with high cost exchange-traded funds (ETFs). In addition, you have no reliable way to tell beforehand which will return more than its added costs. With a , you are highly likely to get an investment return that is close to the securities market return less your costs.

A higher will tend to cause an to trail the return of . Therefore, your chances of picking a supposedly superior are greatly reduced. Even in the short run, only a minority of actively managed perform well enough to compensate for their higher .

In the longer term, even fewer actively managed funds will beat the market, because “superior” short-term performance is mostly due to luck rather than to skill. Luck tends not to last. When the performance evaluation time period gets longer, then there are fewer and fewer actively managed with net performance that is better than a targeting a market return. Actively managed are simply not reliable vehicles to plan for your family’s long term financial needs!

The average manager demonstrates some skill, but the added costs swamp this additional investment return.

Certain scientific studies have demonstrated that some professionally managed equity seem to exhibit a modest level of apparent skill in their ability either to choose and/or to manage their portfolios. These mutual fund managers may be slightly better stock pickers, and/or they may have better portfolio management practices.

In managing their portfolios, these mutual fund managers may not make the behavioral mistakes that many individual investors do. Examples of behavioral investment mistakes are holding on to losers too long and selling winners too quickly.

Scientific finance studies have demonstrated a very slight persistence in stock price trends for some, but not all equities. This persistence could benefit portfolio managers who hold their winners longer and sell their losers more quickly. Evidence of superior skill for bond fund manager seems entirely lacking, so buying no load bond funds is very clearly a better strategy.

Most professional investment fund managers have expertise, but efficient market competition tends to make them all mediocre in the long term.

Just because scientific finance studies do not support buying actively managed funds on a net returns basis, this does not mean that professional money managers are not skillful. To the contrary, the level of professional expertise in portfolio management at most fund companies is very high. However, unlike American schools and colleges, the real-time securities markets have built-in grade and achievement deflators.

On average, the markets deliver C level returns before costs. If your costs are lower, you are more likely to get an A or B. If your costs are higher, you are more likely to get a D or F. The major factor that adds to all the confusion is that market participants must put a current, risk-adjusted value on the future economic prospects of their potential investment holdings.

These highly uncertain predictions make securities market prices highly volatile. After the fact, market participants will eventually be graded on the future value impacts of currently unknowable future events. Some investment fund managers will be lucky, while others will not be in the short run. In the long run, their investment fund manager performance usually averages out.

Minor, short-term skill demonstrated by some active professional investment fund managers, perpetuates the completely spurious active management versus passive management “debate.”

From the perspective of the individual investor, this tired active management versus passive management “debate” or argument is simply and completely irrelevant. Scientific finance studies have the advantage of being done after the fact, and they use large sets of historical data to see what actually did happen. Some studies provide continuing fuel for self-interested industry promoters to keep saying that actively managed provide value.

However, without a crystal ball, individual investors instead face the daunting task of trying to pick some of the few future winners out of a very large crowd of investment fund managers who will not provide a positive net return. The active management debate implies that after all the additional costs, costs, higher capital gains taxes, and extra time are taken into account, investors are supposed to have some crystal ball to sort future winners from losers.

Nobody has such a crystal ball. The closest approximation to a crystal ball that is available is the simple rule to only buy very low cost and ETFs. All very low cost and ETFs are passive investment funds.

The investment fund management industry keeps pointing to past performance and Morningstar ratings as predictors, when superior past performance and 4-star and 5-star ratings are completely useless predictors. Instead lower costs and lower turnover are far superior predictors of future .

Even the scientific studies that demonstrate some professional skill, do not show that this incremental skill justifies paying the much higher fees of active funds. On average, actively managed funds simply do not have sufficiently higher returns to cover even their higher direct management expense ratios.

The research shows that added costs typically outweight added performance by about 2 to 1 or 3 to 1. And, this does not even count the higher trading costs and the deadweight loss that individual investors are subjected to when they pay investment sales loads and !

How is that for an “active” mutual fund or ETF investment return?

Spend 2 or 3 or 4 dollars more to get a dollar back! Waste your valuable time trying to figure out which funds will demonstrate better performance. Take the risk that you could pay far more and still end up picking one of the worst rather than one of the “best” actively managed funds, after the results are in. Do this over and over across your lifetime. Sounds fun, huh?

Did you know that one investment research study on growth demonstrated that there was a 12 to 1 ratio between the cumulative returns of the best performing growth mutual fund to the worst performing growth mutual fund over the 19 year period from 1976 to 1994?? (See: Edward S. O’Neal, “How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?” Financial Analysts Journal, March/April 1997: 37-46)

Sound ridiculous to you? For the slimmer chance of winning the investment manager selection lottery, do you want to roll the dice and end up with a terrible fund or a series of terrible funds instead? Perhaps this is not the best way to plan your family’s financial future.

Why bother listening to this completely self-serving securities industry “debate,” when you can simply buy very low cost, broad market index and ETF, and then get on with your life? Do you really want the pleasure of spending a lot of time in your life listening to one financial advisor after another tell you that a succession of expensive investment funds are “better”? Then, do you want the excitement of watching these “better” funds perform over time, when they are far more likely not to be better as time passes and as your portfolio is harmed?

Furthermore, higher active transactions costs are most often hidden and left out of the comparison, even though higher active fund trading costs can will drag down net returns for higher turnover funds. Also, these studies usually do not account for increased taxes paid by individual investors caused by active trading. Finally, they do not measure the opportunity cost related to an individual investor’s extra time spent on futile, ongoing efforts to pick “superior” funds that most often will not be.

An individual investor is far better served by choosing from among the numerous passive, noload and exchange-traded funds that have decided to compete on low costs.

Obviously, a decision rule that focuses on lower fees will strongly favor passively managed over actively managed funds. You will have more choices than you need, if your restrict your investment fund choices to those passively managed and ETFs that are trying to attract individual investors’ money by charging very low fees.

When screening and ETFs, you should first set a relatively stringent upper limit on the annual expense ratio that you are willing to pay. With passively managed domestic , .5% annually is an overly generous upper limit. Many domestic are available with management fees under .25%. Because of their variety, it is not as easy to generalize about screening international and global . However, much lower management expense ratios should still be the key screening rule for these non-US funds.

With actively managed , you first really should ask yourself whether you have a valid reason for still preferring them over passively managed . If you still have a good reason to select an , which most individual investors will not have, then you should still seek lower management expense ratios among active funds. You might start screening with an upper expense ratio limit of .75% and then move lower. Obviously, you should also amortize any sales loads that you cannot avoid. Again, however, there is never a good reason to pay a front end sales load or back end sales load. There are many better noload available for you to buy directly from no load .

Tags: managed index fund, best no load mutual funds, stock mutual funds, mutual fund manager, best no load funds, index funds, passively managed index fund, management expense ratio, actively managed fund, No Load Funds
]]> http://www.bestnoloadmutualfund.com/best-no-load-mutual-funds-have-low-management-expenses-7.htm/feed Avoid Large Actively Managed Mutual Funds http://www.bestnoloadmutualfund.com/avoid-actively-managed-mutual-funds-6.htm http://www.bestnoloadmutualfund.com/avoid-actively-managed-mutual-funds-6.htm#comments Mon, 10 Mar 2008 18:39:08 +0000 Pasadena Financial Planner http://www.bestnoloadmutualfund.com/avoid-actively-managed-mutual-funds-6.htm This financial article comes to you compliments of: Best No Load Funds. Find the original article here:

Avoid Large Actively Managed Mutual Funds

Big mutual fund portfolio positions and higher percentage ownership of any company’s are not good for actively managed .

These big positions and high percentages are not good for your personal investment portfolio either. Large size constrains how a fund can trade and how efficiently it can do so. When an becomes very large, it must manage its trading exceptionally well, or it will suffer significantly higher transactions costs, which tend to cause lower net . The need to balance short term securities market trading supply and demand will drive up trading costs for actively managed .

There are some extremely large . For example on January 26, 2007, Morningstar, Inc. data indicated that the total net assets of the largest U.S. domestic ranged from $161.9 billion for the largest mutual fund to: $45.0 billion for the number 10 US mutual fund, $25.1 billion for #20, $19.0 billion for #30, and $14.3 billion for #40.1

Only a few of these very large and ETFs were passively managed no load .

The rest were actively managed . All share classes for each fund, including share classes with front end loads and back end loads, were grouped together for these total asset numbers. While exchange traded funds (ETFs) are a much newer investment vehicle than , their characteristics are more similar than different.

In general, individual investors can use and ETFs interchangeably, if they follow the “7 Ways to Pick the Best Noload Mutual Funds and ETFs” The largest U.S. diversified domestic ETF held $85.1 billion and the 10th largest exchange-traded fund held $10.9 billion.2

Keep in mind that the large investment portfolio size issues and the market impact issues discussed in this article are much more significant concerns for actively managed . They are not as important for no load and for ETFs that track passively managed market indexes. This is simply because very large index do far less trading.

Because of how ETFs are constructed, the ETFs that have been introduced thus far for purchase by individual investors tend to be indexed and therefore more similar to passively managed index . Unfortunately, the vast majority of ETFs on the market now track relatively narrow sector index benchmarks. This leaves undesirable industry sector volatility in your portfolio, when compared to broader based market indexes that diversify across all market segments.

The composition of an ETF’s portfolio is transparent and known to the market on a daily basis. Portfolios of actively managed are only known publicly a few times a year. Therefore, mutual fund portfolio composition becomes public long after trading changes have been made.

Given this exposure of an active ETF’s trading strategy almost in real time, there is concern that other traders in the market might front run an actively managed ETF. This has slowed the introduction of actively managed ETFs, although some are coming to market. Nevertheless, there already are some ETFs that do reconstitute their portfolios periodically and these ETFs can be viewed as quasi-actively-managed.

With no load , the target composition of their portfolios can be known through the .

The composition of a particular no load index fund may vary from the index, but usually only by a small amount. The target portfolio composition changes only when the publisher of the underlying bond or stock market index changes the composition of the index. When the index changes, then index must make changes, and this can have a market trading impact. Adverse market impact raises transaction costs and lowers net mutual fund or ETF performance.

Is there a maximum mutual fund size of actively managed that might affect investors’ welfare negatively?

A larger fund can afford more analysts and can increase the number of different company securities that it holds. However, there are practical limits. The size of the positions held will also tend to increase. Very large size can push some funds into investing only in companies with very large market capitalizations.

Many of these very large funds become defacto , because their holdings tend to replicate a large portion of the benchmark securities index, while they charge higher fees and more often deliver inferior net performance after their added investment expenses and costs.

With so much money to invest, it is not practical for these fund giants to track companies with smaller equity market capitalizations or debt issues. Many giant have enough assets to buy smaller companies in their entirety.

However, all diversified investment funds are constrained from doing so by laws and regulations — even if they wanted to so. For example, funds must avoid certain concentrated positions (e.g. not holding more than 5% of a company’s securities) that would jeopardize their legal standing as diversified management companies and their corporate tax exemptions at the fund management company level.

Even if they stay within these legal ownership limits, very large size inevitably increases the fund’s percentage ownership of the securities that it holds. A notable issue faced by very large and by large actively managed is the “market impact” of the fund’s trading activities.

If the fund tries to buy or sell large positions in individual firms over short periods, the fund can adversely affect the market price of that security temporarily. When large funds buy or sell, there must be sufficient trading volume on the other side. A sufficient volume of trades by others with contrary opinions of a company’s prospects must be available. If not, the market bid/ask price range must adjust temporarily to encourage others to enter the securities markets to trade.

Trading induced changes in securities prices can significantly drag down the net of very large actively managed .

In addition, mid-sized can also suffer adverse market impact. If the positions traded by mid-sized funds are substantial relative to the total available short-term trading volume, they will also suffer negative market impact. Nevertheless, this market impact problem tends to be the more acute with larger funds.

Given these considerations about the size of very large actively managed , you might wish to limit the maximum size of the actively-managed mutual fund or quasi-actively-managed ETF, in which you would be willing to invest. You might decide that you are not willing to put your money into funds that exceed perhaps $10 billion or $5 billion in assets or even less. There is no magic excess size threshold. Nevertheless, you should be aware that you can still choose from numerous funds with assets under $10 billion or $5 billion that still meet the other screening criteria from the “7 Ways to Pick the Best Noload Mutual Funds and ETFs.”

Many monster-sized actively managed receive heavy publicity.

You should keep in mind that your familiarity with the brand name of a mutual fund or with the names of does not mean a larger fund is “better” than a smaller one whose name you may not recognize. In fact, because of the problem that investment portfolio performance could be worse for large and very large actively managed , well known brand names might deliver worse performance over the long term.

If well recognized brand names attract excessive asset inflows, this will cause higher trading costs, greater “market impact,” and other investment management problems. In addition, the portion of their portfolios held in cash can increase, and you will get charged the same high for the cash, as well as, the holdings.

Familiarity or lack of familiarity with a mutual fund brand name should not be considered when you screen funds initially. Brand awareness often is simply an indicator of a fund family’s higher marketing and advertising costs that fund shareholders tend to pay one way or another. If other screening criteria indicate that a fund could be attractive, the fact that it is an unfamiliar fund should have absolutely no bearing on whether you decide to do more investigation of an unfamiliar mutual fund — preferably a no load index fund.

Understand that large mutual fund portfolio size is a far, far greater concern for actively managed managed funds than for passively managed index and ETFs that track bond and stock market indexes.

Very large passively managed do far less trading, because they trade only to invest net inflows or to redeem net outflows. In contrast, large actively managed funds incur much higher trading costs in pursuit of better returns, which raises the hurdle than they must get over just to break even on these attempts.

With an , for example, the or managers can simply decide to change the composition of the investment portfolio and incur the trading cost and market impact. Every hopes to gain more than the incremental trading costs, when they do this.

Of course, when all these collective buy and sell decisions are made, fund managers are more likely to be wrong than right. They have no crystal balls about what will happen to securities market values in the future. For every securities buyer there must be a seller and for every securities seller there must be a buyer. Actively managed mutual fund portfolios get rearranged, trading costs go up, and total net performance must come down.

If you are considering investing in a very large , you should think about the alternative of investing in a noload mutual fund that targets the same index benchmark.

No load do significantly less trading through their buy-and-hold strategies. They have a lower likelihood of a performance shortfall due to their market trading impact. Of course, index fund expenses should be substantially lower, which is also much more likely to improve net .

As mentioned above, when an ’s size grows very large, its portfolio holdings may also move closer to the composition of the market index. There is strong evidence that the portfolios of most very large, large, and even medium sized actively managed closely resemble the composition of the passive indexes against which their performance is benchmarked.

However, the annual percentage expense ratios of these actively managed funds are far higher than the annual percentage fees of passively managed . Active mutual fund shareholders are charged much higher annual management expense ratios across both the active and passive portions of their portfolios.

In effect, you pay an extremely high asset management fee for just a little active management. This is because you pay a higher across all fund assets, but only a much smaller portion of the investment portfolio is really being managed actively.

Of course, portfolio managers might disagree. Nevertheless, how do they explain the most likely outcome, which is to relatively closely track, but usually under perform the benchmarket? Whatever the reasons or excuses, you can decide if you want to keep paying high fees for closet indexers who under perform.

More often than not individual investors lose, when they hold actively managed . The longer the time period is that investors hold actively managed , then the smaller and smaller the chance is that they will actually “beat the market.” Sadly, this transfer of assets from individual investors to has continued and has grown for decades. It is well past time for individual investors to wise up!

1) http://screen.morningstar.com/FundSelector.html This is Morningstar.com’s free mutual fund screener. Check the Sitemap for our articles about free online fund screening applications and databases.

2) http://screen.morningstar.com/ETFScreener/Selector.html This is Morningstar.com’s free exchange traded fund screener. Check the Sitemap for our articles about free online fund screening applications and databases.

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