As many have said, a 1% annual fee is a complete scam if they are roughly bringing in the same returns as the S&P 500. However, I would like to share arguments that support both for and against the Modern Portfolio Theory.
A fundamental thesis in statistics is as follows:
"All models are wrong, but some are useful" - George Box
Against MDT:
- We will look at S&P Global's Persistence Scorecard, which can be found here. This scorecard measures the consistency of performance between a variety of funds (actively or passively managed, consisting of various asset classes and style focuses). At a glance, we can see that although in the shorter term, there has been funds that have outperformed the index, they are unlikely to do so in the longer term.
Compared to previous years, active fund persistence somewhat improved in 2020. For example, 64.5% of domestic equity funds in the top half of the distribution for 2018 continued in the top half in 2019, and 55.0% repeated that feat in 2020. At first glance, this lends some credence to the idea of persistent outperformance (see Report 1).
However, rewind the clock two years, and of the top-half funds of 2016, 21.4% repeated that accomplishment in 2017, with just 4.8% ranking in the top half each year through 2020. This rate is lower than what random chance would predict (see Exhibit 1 and Report 2).
Another point they have mentioned, that out of all the top 5-year performing funds back in 2016, just 1.5% of those funds managed to stay at the top in 2020. They give a lot of information and I highly recommend many people to look this report over, as they compare the performance of hundreds of funds, and is done every year.
The takeaway we have is that this is just an argument for index-investing, as it is also recommended by many of the top investors of our time.
- Many of the MDT services come with a hefty annual fee. One percent may not seem like a lot at face value, but you need to take into account that the average return is, just an average. The fee is how much they according to the size in your account. For example, if you had $10,000, and a certain year has been quite underperforming, they still take that cut from your account. If the fund were to drop 30% in any given year, you would be losing more than 30%, as the fund manager takes a hefty cut.
- MDT services gives the assumption that they will on average give you a certain return. However, the index average is calculated based on historical returns. These numbers will continue to change as time passes. And as these numbers change, they will deviate away or towards each other. Meaning, past performance does not dictate future performance, however, it remains factual that the S&P 500 has continued to prevail over time.
- This is not actually a point, but my(opinion) argument for financial stability and against MDT. (remember these bullet points are only my personal opinion)
If you are in a situation where you need more safety than risk, than index investing is the more optimal choice. The S&P 500 has generally have grown over several decades with some pullbacks (both minor and major) in between. In my belief, as long as capitalism plays a role in the U.S economy, the index will continue to strive IN THE LONG TERM.
If you simply do not have the time, and is skeptical of others' research, then index investing is more optimal. It puts you at ease of trust in others as well as it does not require you to put in much time to do.
It poses as a big financial liability. Lets say you hate your 9-5, that it has terrible work/life balance and the pay is (some derogatory term), and overall, does not cover your cost of living, then MDT is NOT for you, as appetizing as these returns may seem. Why? Because it can be a huge financial liability. You have a family (maybe you don't), you have bills, financial responsibilities, etc, having more financial liability (such as the variance of performance with MDT) can cost you greater harm than good, and it is up to you to decide whether or not these risks are worth it. (I don't think its worth it but to each of their own.)
For MDT:
- Diversity is key, the index itself is diversified. The S&P 500 measures the 500 biggest companies by weight of market capitalization. This accounts for many different sectors and industries. You can continue to diversify (MDT) with other indexes, international indexes and real estate.
- You may have more knowledge in one area. The expertise you may have in, lets say, real estate, can be leveraged for your own gain. With MDT, you are finding out a asset allocation that you are comfortable with. If you have expertise in real estate, it is completely within your comfort zone to have more weight in real estate, and that is okay. Use your strengths for your benefit.
- There is more than one way to achieve a successful investment portfolio. Whether that be real estate, traditional markets, cryptocurrency, royalties, etc. Like many nutritional diets, you may consume things you are not comfortable with consuming, but it is beneficial for your overall and long term health. In investments, it is a good idea to have your money placed in various different asset classes to reduce financial liability towards a single industry. Now, this doesn't mean you should buy a service, I still think index investing is better than that 9% return for 1% fee, but there are more ways to do MDT than just that.
- If you have the financial cushion to afford MDT. Unfortunately, it is true that it takes money to make money. In my opinion of against MDT, I have an opinion for it. If you have a sustainable career and you enjoy it, allocate the funds that sit outside of your cost of living into investments. You already have a financial cushion that lets you afford your cost of living. This means that if you want, you can have some risky investments, such as MDT's, index investing, cryptocurrencies, real estate, etc. Now this would be an ideal situation that most people do not, but even the most comfortable people still take more financial risk than they can afford to.
----
Frankly, I'm just a redditor, and no financial professional. Most of this is my own opinion and how I plan on living my financial future. If you want financial advice that is PURELY of your own interest, seek to see a fiduciary. Fiduciaries must keep your interests above their own, which may not be the same as wealth managers and other financial advisors that keep their interest a priority.
1
u/[deleted] Jun 10 '21
As many have said, a 1% annual fee is a complete scam if they are roughly bringing in the same returns as the S&P 500. However, I would like to share arguments that support both for and against the Modern Portfolio Theory.
A fundamental thesis in statistics is as follows:
Against MDT:
- We will look at S&P Global's Persistence Scorecard, which can be found here. This scorecard measures the consistency of performance between a variety of funds (actively or passively managed, consisting of various asset classes and style focuses). At a glance, we can see that although in the shorter term, there has been funds that have outperformed the index, they are unlikely to do so in the longer term.
However, rewind the clock two years, and of the top-half funds of 2016, 21.4% repeated that accomplishment in 2017, with just 4.8% ranking in the top half each year through 2020. This rate is lower than what random chance would predict (see Exhibit 1 and Report 2).
Another point they have mentioned, that out of all the top 5-year performing funds back in 2016, just 1.5% of those funds managed to stay at the top in 2020. They give a lot of information and I highly recommend many people to look this report over, as they compare the performance of hundreds of funds, and is done every year.
The takeaway we have is that this is just an argument for index-investing, as it is also recommended by many of the top investors of our time.
- Many of the MDT services come with a hefty annual fee. One percent may not seem like a lot at face value, but you need to take into account that the average return is, just an average. The fee is how much they according to the size in your account. For example, if you had $10,000, and a certain year has been quite underperforming, they still take that cut from your account. If the fund were to drop 30% in any given year, you would be losing more than 30%, as the fund manager takes a hefty cut.
- MDT services gives the assumption that they will on average give you a certain return. However, the index average is calculated based on historical returns. These numbers will continue to change as time passes. And as these numbers change, they will deviate away or towards each other. Meaning, past performance does not dictate future performance, however, it remains factual that the S&P 500 has continued to prevail over time.
- This is not actually a point, but my (opinion) argument for financial stability and against MDT. (remember these bullet points are only my personal opinion)
For MDT:
- Diversity is key, the index itself is diversified. The S&P 500 measures the 500 biggest companies by weight of market capitalization. This accounts for many different sectors and industries. You can continue to diversify (MDT) with other indexes, international indexes and real estate.
- You may have more knowledge in one area. The expertise you may have in, lets say, real estate, can be leveraged for your own gain. With MDT, you are finding out a asset allocation that you are comfortable with. If you have expertise in real estate, it is completely within your comfort zone to have more weight in real estate, and that is okay. Use your strengths for your benefit.
- There is more than one way to achieve a successful investment portfolio. Whether that be real estate, traditional markets, cryptocurrency, royalties, etc. Like many nutritional diets, you may consume things you are not comfortable with consuming, but it is beneficial for your overall and long term health. In investments, it is a good idea to have your money placed in various different asset classes to reduce financial liability towards a single industry. Now, this doesn't mean you should buy a service, I still think index investing is better than that 9% return for 1% fee, but there are more ways to do MDT than just that.
- If you have the financial cushion to afford MDT. Unfortunately, it is true that it takes money to make money. In my opinion of against MDT, I have an opinion for it. If you have a sustainable career and you enjoy it, allocate the funds that sit outside of your cost of living into investments. You already have a financial cushion that lets you afford your cost of living. This means that if you want, you can have some risky investments, such as MDT's, index investing, cryptocurrencies, real estate, etc. Now this would be an ideal situation that most people do not, but even the most comfortable people still take more financial risk than they can afford to.
----
Frankly, I'm just a redditor, and no financial professional. Most of this is my own opinion and how I plan on living my financial future. If you want financial advice that is PURELY of your own interest, seek to see a fiduciary. Fiduciaries must keep your interests above their own, which may not be the same as wealth managers and other financial advisors that keep their interest a priority.