- The Finance Gourmet

Active Investment Managers Underperform Indexes

October 5, 2022 by Finance Gourmet

Every year or so, somebody freshens up a study that shows active mutual fund managers underperform passive investing, usually in the form of an ETF of the category benchmark. In plain English: Buying the ETF instead of the mutual fund of the same type will generate higher returns for you over the long-run, and often even the short term. So, why are active investment managers so bad? Mutual Funds Cost Money to Run Mutual funds are not charities. They have expenses they need to cover. Expenses include everything from offices to high paid analysts, to traders to execute the trades, to all of the electronics and equipment it takes to monitor and use all the information in the trading world. Oh yes, then there is the matter of profit. These expenses are disclosed to all investors in the required information made available to any investor in the prospectus and on most trading and investment research platforms. Pulled quickly and semi-random is the Dodge & Cox Stock Fund, a large U.S. stock mutual fund. You will notice that compared to the S&P 500 index listed below, our well-respected Morningstar 5-star fund returns less than the S&P 500 over any time period. …

Active Mutual Funds Suck Compared To Index Funds

March 28, 2022 by Finance Gourmet

You have probably heard before that most mutual funds do not beat the market. Well, it’s true again, or true still, whichever you prefer. The S&P Dow Jones Indexes (yes, they might be a little biased, but they make their data available, and no one says it’s wrong) put out a report called SPIVA U.S. Year-End 2021 in which they state that nearly 80% of all actively managed domestic equity funds lagged the S&P 1500 in 2021. Even worse, 98.6% of actively managed large-cap growth funds failed to beat the S&P 500 Growth. If that sounds too specific for you, 85% of actively managed large-cap funds trailed the S&P 500. The numbers aren’t much better for other categories. This year, the SPVIA leaves no room to “Yeah, but…” by putting to bed the notion that actively managed mutual funds better handle volatility noting that whether it’s 3-year, 5-year, 10-year, or 20-year risk-adjusted returns, active funds underperform the index. Survivorship Bias The reality is that the situation is actually much worse. Every year approximately 5% of actively managed mutual funds disappear via merger or liquidation. If you think mutual fund companies are merging or liquidating their winning funds, then I have …

Are Gold Mutual Funds a Good Way to Invest In Gold?

February 9, 2023March 9, 2022 by Finance Gourmet

Recently, a client explained to me how he thought gold was a good investment and protection against inflation. I’m not going to talk today about if he is right or wrong. Instead, I’ll mention that his fabulous do it yourself investment solution was Fidelity’s Gold Fund. Good call? Gold Mutual Fund Holdings Well, it came as quite a shock to him that actual gold is only the sixth biggest investment in the fund. Five bigger investments in the mutual fund are in companies that have something to do with the gold industry. Granted, those companies’ stock prices will be heavily influenced by the price of gold, but certainly not on a one-for-one basis, and it is very possible for gold companies to have problems (and thus lower stock prices) unrelated to gold prices. If the point of investing in gold is to get an alternative investment from the stock market itself, investing in the stock of gold-based companies does not achieve that goal. — Is Bitcoin better than gold for this purpose? Gold companies are very susceptible to environmental lawsuits and regulations. Not to mention, gold happens to be mined in some very unstable countries throughout the world. A military …

Is Ark Innovation a Scam?

February 18, 2022 by Finance Gourmet

Sometimes, a fast rise comes with expectations that are difficult to live up to. Sometimes the person rising fast doesn’t really help matters. Cathie Wood came into the “mainstream” of financial news with a prediction of a huge rise for Tesla. She was “right,” at least over that sample period, and then some guy anointed her best stock picker of 2020. That will attract some eyeballs. But, just like Abby Joseph Cohen rose to fame by always being more optimistic than the next stock market analyst who said, “Are we really sure all of these no-earnings, no-profit, internet stocks should be pulling everything this high?” while the market rose and rose during the internet bubble, being right isn’t always so much being right, as being the last one to ignore the iceberg. Cohen told investors to “buy the dip” as the internet bubble popped, and the market crashed. I hope everyone who thought she was amazing just didn’t listen to her that time… Wood’s problem is that when you become famous for catching unicorn, people only think you’re amazing while you still have one. Since finding another one is almost impossible, there is a tendency to hold on too long, …

Dodge & Cox Stock Fund Analysis

January 13, 2022January 7, 2022 by Finance Gourmet

Updated January, 2022 Great Large Cap Value Stock Mutual Fund One of my favorite mutual funds is the Dodge & Cox Stock Fund (DODGX). This isn’t some flashy hey-look-at-me mutual fund. In fact, this is exactly the kind of fund that people started questioning during the Internet bubble, and that is a good thing. It did not get caught up in the Internet bubble like many other stock funds. Its returns of just 5.4% and 20.21% in 1998 and 1999 respectively earned it a lot of scorn when Janus Funds were near 100% returns, but the proof of greatness isn’t riding along with crowd hysteria. The proof of greatness comes in 2000 and 2001. When other funds were getting crushed, DODGX was making money! In 2002, it managed to drop just 10.5%, almost half of what others were losing. The real proof of greatness is that it did not achieve these results by hiding and investing in “safer” places. In 2003, when the market turned back up, they were right there. This is what a great fund looks like. Limited Time Offer? For the last several years, the Dodge & Cox Stock Fund has been closed to new investors, so …

Lowest Cost Mutual Funds No Minimums

December 7, 2022April 25, 2017 by Finance Gourmet

When it comes to getting started investing, it is often that first step that becomes the biggest hold up. For many would-be investors the most formidable barrier is actually free, that of setting up an actual account. However, for those with the momentum to cross that line, the next barrier is the cost of investing, most often in the form of a minimum investment. Skipping over these two barriers is one of the things that makes automatic investing apps like Acorns so attractive to new investors. They both eliminate the need to choose and set up a brokerage account and offer a way to get started investing with as little as five dollars. No Minimum Investment Mutual Funds with Low Costs Theoretically, a single investment in a mutual fund with a $1,000 doesn’t sound insurmountable. However, when every reputable financial advisor recommends diversifying your investments among several different funds, that $1,000 minimum quickly adds up to a $5,000 or even $8,000 minimum, to obtain the right kind of diversification. Throw in a 5.25% up-front load for many mutual funds sold by advisors, and that’s a lot of initial overhead. Fortunately, there are many low-cost, do-it-yourself mutual funds that you can …

PIMCO Equity Funds Win Again

January 14, 2021March 9, 2012 by Finance Gourmet

PIMCO is synonymous in the investing industry with bond mutual funds. More specifically, PIMCO is synonymous with Bill Gross and the PIMCO Total Return fund, which is the world’s biggest, and one of the best, bond mutual funds. However, PIMCO actually offers a full range of investment products, including equity mutual funds. As Reuters reports, PIMCO actually managed to win the best large company equities award from the Lipper Fund Awards. I’m not sure whether to mock Reuters for repeatedly using Pimco, when everyone knows it’s PIMCO, or if there is an AP Style rule I’m missing. Either way, the bond mutual fund giant won the award last year as well, marking two straight years at the top. Before you load all your money up into PIMCO StockPlus TotalReturn or PIMCO StockPlus Short Strategy fund, it is interesting to note that PIMCO’s funds of this nature aren’t very traditional. Rather than owning shares of publicly traded U.S. companies, these funds have a lot of investments in various derivatives and contracts. This allows PIMCO to profit from moves of a macro nature rather than being right about specific companies. There is an advantage to this form of investing. For example, if …

PIMCO Total Return Bond Fund Cuts U.S. Government Holdings

January 14, 2021February 15, 2011 by Finance Gourmet

Pimco Total Return is the biggest bond mutual fund in the world. It has a long-term track record that any bond fund would be jealous of. As a result, its fund manager, Bill Gross, has become something of an oracle of investing in bonds. Recently, the mutual fund reported its holdings. Like all mutual fund reporting, the data provides only a snapshot of one day of holdings within the fund. The Wall Street Journal reports that the allocation of assets in the Total Return fund in U.S. Government bonds and securities dropped again to just 12 percent of the overall portfolio, down from 22 percent at the end of 2010. Gross has become increasingly critical of the government’s intervention in the bond market and in particular of the Fed’s action to hold down interest rates by buying U.S. treasuries. One can understand his frustration as these manipulations make it difficult for a money manager to do his job, regardless of their overall value (or lack thereof) to economic stability and growth. The real irony is that with U.S. treasury yields depressed, and Gross having sold out almost anything he can at the Fed’s inflated pricing, there are few places to …