On actively managed funds vs passively managed funds...

I was reading this article today on LA Times about how actively managed funds have come up short (again) when it comes to performance since the big rebound of the market from its financial crisis in 2008, compared to passively managed funds.

I have always been rather cynical about actively managed funds, not only on how much higher the management fees are (compared to index funds), but also on how mediocre (or worse) their performance have been. The meltdown of the market in 2008/09 is perhaps my last straw, no doubt it's the same for most people who have money to invest. One of my IRA (rollover from 401k in one of my previous jobs) that I have left it as-is in actively managed funds had been "decimated," erasing ten years' worth of value that were added, effectively putting it on par with just the contribution amount from myself and my prior employer.

I've pulled out from those few funds, not because I panicked at the time (in 2008/09), but I was so fed up with the fund managers. I kept asking myself, what's the point of paying all these "managers" all these high fees all these times, delivering just mediocre returns even during the best of times (when the bull market was flying high), and performing far worse than the market and the index funds when the financial crisis hit. In the best of times, when literally every boat got lifted during high tide of bull run, I pay those high fees; in the worst of times, my portfolio takes the hit but these "managers" still take the fees. Effectively, the managers have all the upside, and I take all the downside. I realize at that point, that it wasn't me who panicked, but it was these darn fund managers who sold everything with the panic button. By selling when the market went down, these idiots had ensured that there's no way to rebound. If they have truly believed in the assets that they're holding, rather than just following the market, why selling them, and why selling them now in a fire sale? If they're just following the market, I can easily do that myself or use index funds.

This fund manager of mine, is Fidelity. Apparently they're not alone, because the same happened to my husband's holdings. His fund manager? Janus. Given how the actively managed funds in general had performed historically and since, I don't think Fidelity and Janus are alone in their sheep mentality to blindly follow the market.

'nuf said.

So then, I decided to withdraw all the money from all my other actively managed funds and consolidate, again not out of panic but out of this total weariness of how pathetic this whole fund industry is. I should have done this long time ago, but complacency and laziness got in the way - yes, lame excuses but when nothing blows up, rebalancing one's portfolio seems to be the last thing on my to-do list back then. To a large extent, the market meltdown in 2008/09 was a godsend since it prompted me to finally do something.

There have been so many other issues with the fund industry concerning transparency, including the issue of pricing of the funds, frontrunning their own clients, etc. There's just no way I would entrust my money with them anymore.

For a time, the Janus funds that my husband has had were doing alright - yes, it's just alright compared to the index, but he's lazy for a while, like myself - but something happened. The Janus funds had had change in management, and the new fund managers were even more mediocre than the predecessors. That's his last straw. I suppose in fund management, the funds are only as good as the managers who oversee them. I'm sure Peter Lynch would attest to that.

I should say though, that selective hedge funds could still thrive. They have the advantage of being totally non-transparent (which is counter-intuitive), allowing them to make all kinds of bets in all kinds of industries. But with big up's, it always comes with big down's. I don't feel like gambling anymore. I would rather settle for lower but more sustaining growth and yield.

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Since 2008/09 when I pulled and pooled all my money out from the funds, I've managed them myself with self-brokerage. I spread them out over ETF (with more transparency in pricing in open market than mutual funds), index funds (with very low fees), and day-trade on selected stocks.

For a while, it works quite well. The markets have bottomed out from such low that they have nowhere to go but up. I built back up my portfolio a little bit for about 25-30% a year return, net of fees (brokerage fees for trades) for a couple years. Then again, even a dog can make money by going in with both feet during those two years. It doesn't take any genius at all.

Starting 2010, something occurs to me. It didn't feel right to me anymore since it felt more like casino gambling. Even good companies can get through gyrations of ups and downs in prices within short span of time that are totally without reasons. I'm sure the algo traders have a lot to do with it. I don't feel like gambling away those retirement dollars and praying for the best. Anyone who has some ability to spot trends and patterns in charts can easily see through this; that's what the algorithms do best anyways. The charts of almost 95% of the companies I look were all trending down, pointing to an inevitable pullback of the prices at some point. It has to. I don't want to be the one holding the bag.

About the time, some properties in a few choice neighborhoods around where I live came on the market, and I like them. My husband isn't so thrilled. He feels that properties are too illiquid, with too much maintenance needs for his taste, and the financial burden is too long term. To be sure, they are all valid points; but they are also the usual talking points for why any investors should choose stock market over properties. Just talk to any financial advisors who want to invest your money to stock markets for fees and commissions, and you'll hear the same talking points. Anyhow, I went ahead anyways, and bought a few properties since 2010.

No one would have foretold exactly when the bottom of the property market would have been. Anyone who told you that they knew, is lying. It's simply impossibly to time the markets because no one has the crystal ball. In hindsight, property market pretty much bottoms out around the time I pull back from stock market and start buying properties around 2010 in my area. I would be the first one to tell you that I have absolutely no idea when that bottom might be; but it just feels right to me at the time. The prices were right historically. The properties are good (great property in great location and in great shape). Rental support is strong. The economy around my area has never gone down in the worst of times. The public schooling system also provides great support to the demand for properties in the area.

Looking back, buying the properties is a great move. Without the financial crisis, I would never have been able to buy so many good properties in good location in such short timespan, with strong rental and capital value that has increased between 10-30%, among the few of them. The mortgage rate is lower than ever. I can't be happier.

Better yet, the net rental return is 10%+ which is way, way better than plunging in the stock markets and hope for the best. I don't want to have a retirement portfolio that relies on dumb luck or leave it at the mercy of some dark pool manipulation. In fact, I could have quit my day job now, manage the properties, and have yet more monthly income than my current day job (high income bracket notwithstanding).

An added bonus is the ultra-low mortgage rate. It's almost like free money from the bank to fund my retirement. Amidst all the talk and blame game about the Fed under Bernanke for leaving the mortgage rate too low for far too long, and for not ending the stimulus program (now in its third incarnation in the form of QE3), I would have Bernanke to be thankful to. That said, I do feel there's certain truth in it, in that, the ultra-low rate environment is once again encouraging people to take unnecessary risks that they might not have otherwise been able to take, endangering others along the way (hello, big banks!). Am I one of those on this bandwagon? I might have been, I'm afraid.

One thing has to be said about the low mortgage rate: It's great only if you can get it. Banks have become such a pain to deal with, but I've come to appreciate that's what it should be. Banks should have vetted borrowers more stringently; back in the go-go days in pre-2008, even a dog can qualify for a mortgage. Federal government has fed the illusion by propositioning ownership nation (as George W Bush has advocated it so adamantly, much like he did with the Iraq War). For all the valid points that my husband has raised about the illiquidity of property market and the very long mortgage term, one has to have sufficient buffer to absorb any system shocks, rather than just praying and expecting property prices to always go up, as most subprime borrowers did, pre-2008, for either refinancing or flipping the property to bail them out. When markets turn against you, all these options would dry up, as a lot of people have painfully found out. Instead of simply talking up property ownership, these folks need serious education to learn the severe downside that comes with it.

In any case, my husband takes a different tact. He continues to hold his faith in stocks, though he has been burnt enough times now. I'm not so sure about relying on paper gains for retirement portfolio. It doesn't feel right.