Actively Managed Funds (Gambling) 4

So… I made a small mistake.

Two posts ago, in Could Index Funds Be Bad?, I said at the end that my next post would be about Actively Managed Funds (Gambling). However, for some reason I decided to make the next post, The Biggest Mistake of Your Life.

I’m not sure why this happened. Nonetheless, here is that post:

So in my previous post, I spoke about how if index funds ruled the world that there would be chaos. Dogs and Cats Living Together. Mass Hysteria.

However, I also suggested that the likelihood of this happening is very low. As long as there is a game to play, there will always be people who try to win, and for some to win, some must lose.

Once again: Relevant Tweet via Owlturd

I know. I know. You like index funds. Fine. But tell me about actively managed funds…

Ok. So let’s find an example of an actively managed fund. I typed “actively managed funds” into Google and found this article:

Actively managed funds roar back — here are the best of 2015

The first fund on their list that has a “history” is Fidelity Select Biotech Portfolio – FBIOX and here are its returns:

YTD June 2015: 27%
2014: 35%
Average last 3 years: 46%
Average return last 4 years: 39%

Those are some nice numbers to be sure. But, of course, hindsight is 20/20. “Prior results do not guarantee a similar outcome.”

How has this fund been doing since June 2015? Go here to check:

Select the chart tab, and put in 6/24/2015 and the last end date, which is 9/22/2016. On the first drop down box on the left, choose “Price”.

On 6/24/2015, when this article originally was published, FBIOX was selling at: $274.90.

On 9/22/2016, it is selling at $199.35.

It hit a low of $157.78 on 2/12/2016.

It hit a high of $295.41 on 7/7/2015.

So… long story short, if you had read this article and decided that FBIOX was good fund to buy. you would have been elated to watch its price rise from $274.90 to $295.41 from 6/24/2015 to 7/7/2015. Then, you would have been on a roller coaster ride to the bottom. You would helplessly watch your stock drop from nearly $300 to $150 in early 2016.

Would you have sold it at its high of ~ $300? Would you have sold it at the bottom at ~ $150? Would you still have it now?

Its expense ratio is 0.73%, which is significantly higher than the 0.05% of Admiral Shares VTSAX which I’ve talked about before. However, that expense ratio isn’t horrible overall.

Here’s an example:

The first pick on that list is: Catalyst Macro Strategy Fund – MCXAX. It has a 1.95% expense ratio AND a 5.75% front load. OUCH.

Looking at its chart, if you had bought it around 6/24/2015, it was selling at: $11.17, with a high of $13.18 on November 27, 2015, and it is trading today at ~$8.75. This is a new low for our time period , as its previous low was $8.18 on January 6, 2015 (prior to the article).

Once again:

Would you have sold it at its high of ~ $13? Would you have sold it at its new low of $8.75? Would you still have it now?

If you sold at the high of ~$13 after buying for $11.17, would that cover the 5.75% front load and 1.95% expense ratio? How much actual profit did you make, from “selling high”?

Using an actively managed fund is straight up gambling. 

You are trying to buy low and sell high. You are trying to time the market.

You are trying to do everything I don’t want you to do, in terms of Investing and Retirement.

But… It’s fun. Gambling is fun, and addictive. And make no mistake, this is gambling.

I invite all of my readers to go ahead and do this exercise because it will help you understand more:

Pick a stock you like today and just “watch it” for the next year. Next year around this time, see how that stock is doing, and assume you put $10000 into it.

It is up from when you bought it? What was its high? What was its low?

If you had sold at its high, would you have made enough to justify the load and expense ratio? 

If you had sold at its low, how much would you have lost?

Remember, you can’t assume you would have sold at its high. When do you think you would have sold?

So what is the point of this article?

For some of you, you will believe me and be ok with just staying the course and doing only index funds. Some may need a nudge from the above exercise. However, for some of you, you may think you can beat the market and only experience will allow you to change this mindset.

If, after the above exercise, you still believe you can beat the market, then please listen to this next piece of advice:

Allocate no more than 5% of your investing to playing around with actively managed funds in an attempt to beat the market. That may not seem like much, but it is still a few thousand dollars when you are starting out, becoming tens of thousands of dollars later on. Don’t forget to track the money you put into these actively managed funds as well as the money you lose from load and expense ratios.

After a few years of playing around with actively managed funds and stock picking, do some calculations. Evaluate the difference between putting that extra money into an index fund versus playing around with actively managed funds and stock picking. Unless, you are a stock picking savant and/or really lucky, I think you will be unpleasantly surprised by the difference.

The rule of thumb is: Only gamble what you are ok losing.

This holds true for investing/retirement as well.

Let’s give an illustrative example:

When you go to Las Vegas, you may lose a few hundred dollars at the blackjack table. It’s not a huge deal because you are ok losing that, so you go to the buffet and eat some Kobe beef and you are happy.

However, would you go to Las Vegas and throw your $5 million retirement onto the blackjack table and say “hit me?” [I hope not.]

The house always wins. You’re not the house. (You’re not Daniel Ocean either.)


Make no mistake. Actively Managed Funds is gambling.

Only gamble with what you are ok losing.

A maximum of 5% of your portfolio should be actively managed, preferably 0%.

The house always wins. You’re not the house. (You’re not Daniel Ocean either.)



Agree? Disagree? Questions, Comments and Suggestions are welcome.

You don’t need to fill out your email address, just write your name or nickname.

Share this:

4 thoughts on “Actively Managed Funds (Gambling)

  • ChrisCD

    Came here from WCI. Although I primarily use ETFs, I do also hold some individual stocks. I think one thing the article left off though is how a broad based passive fund has performed to compare. So far my individual picks have outperformed my ETFs, but not by a very significant amount and certainly not with anywhere near a long enough time horizon to believe I am a stock picking Savant.

    I agree with you that if you feel like you just need to have some fun and do your own picking, make it a small part of your overall portfolio.

    Nice article, though.
    cd :O)

  • TJ

    Also found this place from WCI.

    I think there are definitely some active managers that add some value. The question is if they are worth the after tax cost. I think it probably doesn’t make sense for high earners to utilize them in taxable accounts because of the taxes on the higher distributions vs. the equivalent index. I think Berkshire Hathaway would similarly make great holding in a taxable account for a higher earner for the same reason – no distributions.

    One firm I like is Mairs and Power in Minnesota. Are the expenses higher than indexes? Sure. But their portfolio is about as exciting as watching paint dry. Sometimes they out perform the broad market, sometimes they under-perform. The way they run their funds does not seem to be gambling, and I don’t believe my choice to use their funds is gambling. =)

    I also use some of the active stuff at Vanguard. I don’t realistically expect my large cap active funds to deviate all that much from the broad index, but I definitely think there are segments of the market that might be more inefficient and managers can add value. Small caps could be one such segment, emerging markets could be another. But you’d have to feel pretty confident in your choice, and be willing to be wrong. So to some extent, it is gambling. But there’s more involved than rolling a dice or playing the slots.

Comments are closed.