why do funds perform so poorly?

Quote from Grob109:
I think the factor you may be looking for may be threefold.

1. a manager may also take into consideration the risk tolerances of his clients therefore will limit his drawdown and risk-taking to meet their needs. whereas before when he was a private trader his risk tolerances were different.

Some brokerages are set up to only handle those who pass their tests. They are called boutiques. Their primary purpose is to make money for people who understand making money with money. Their consistant goal is to takeout of the market what is available. Drawdown is not on the table in these instances. Money velocity is. You may want to check out the scene to find out what is going on in the real world. The lower limit of operations of these outfits is usually 8 to 10 times the average of ten years of market operation.

2. the markets do not always produce profit-capturing opportunities. when they are there, fast traders may capitalize on them. when they are not, and traders push it they can lose. markets can be flat, moving well, or volatile. If they are not, some traders simply don't enter the market - overall in both cases reducing their returns for the year.

Here is a rewrite of your coment: " The markets always produce profit-capturing opportunities. Always being there, any EOD full time employed trader may capitalize on them. It is always true that segments of markets may be flat, moving well, or volatile (and traders who do not prepare well may push it they can lose). At all times, every day a trader has an opportunity to enter the market and make money on the level of any boutique brakerage operation. .

3. even the best trading systems work in some kinds of markets and set-ups but may not work as well in others. the markets are always changing. a killer system that works perfect for a day or a year may suddenly begin not working as well. again, diminished returns are the result.

The above is not a test of a viable trading system. If a given system operates as described above it should be dispenced with and never used again. Any viable trading system works throughout the range of operation of the markets. It may be seen in this thread that most people do not "get it" with respect to making money.

Making a trading approach immune to the verities of the market is not difficult to do. Any person can reasonably be expected to accomplish this. The above was written by a high school drop out and that has nothing to do with his limited view so far in his life. He could any time he wished go through the process of coming up with a bullet proof trading approach for the stock markets. I use the attached to start anyone down this path. It has been shown in ET that the first year of instituting a process nails about 100% ROI/yr. After that, several doublings can occur.

There is no mystery about how to make money in the markets.
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maybe not, but it's a mystery how anyone can read the size of your post font without getting a headache.

unlike you may want to convince yourself, size does matter.
 
Quote from FXsKaLpEr:

maybe not, but it's a mystery how anyone can read the size of your post font without getting a headache.

unlike you may want to convince yourself, size does matter.
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I've never done anything with respect to font size; I commonly just go with the flow.

One exception: Medicare. the law requires that I work in 12pt minimum and have 100% of copy pre-approved by CMS before it goes into the field.
 
Perform poorly in terms of what? Your expected standard of good old greed in the short run?

Look at the track record of Warren Buffet or Bill Miller of Legg Mason on a year over year basis. Do you really think you can consistently do that?
 
Quote from drsteph:

Don't be so quick to knock portfolio rebalancing. While I am leery of its long term implications in an uncertain world (i.e. what has worked for the last 70 years post depression may not work in the future), you must admit that winning a nobel prize for something (MPT) does at least suggest that, at the time, it was a good idea.

The main tenet of MPT & rebalancing is that it minimizes overall risk while coming close to maximizing overall return. While I cannot find the specific numbers from a study I recall reading, comparing a rebalanced to an unbalanced portfolio gave you a 10% avg return with a -4% max annual Drawdown for the rebalanced portfolio vs. 11.2% annual return and a -10% max annual drawdown on the non-rebalanced portfolio.

For my "I need this money not to go away " portfolio, I'll choose the rebalancing. I'm not looking to make a killing there, just have a reasonable chance of preserving capital and outpacing inflation.

For my "aggressive investment" portfolio, I'll probably not rebalance - rather just trade in and out of funds, ETF's or individual larger caps. 20% maxDD there for a 20% or larger ann yield.

For my "risk capital" portfolio, I'll never rebalance. But I'm willing to risk 50-100% of that portfolio for a 100-300% return. Those are purely spec plays, options, growth small caps, futures, whatever.

And for the record, since a lot of these funds are really similar to trading an index, why can't you 'trade' them? One of the most important decisions you will make is WHEN you buy into the fund, so if you know that the market is going to crap out in october, why would you purchase your S&P index fund in september? Buying yesterday vs at the top in september saves you 4%, which is about half your annualized expected gain after expenses. Now, it is much easier to have an 'up' year. Ditto for the rebalancing - choose your view and go with it. If you are wrong, well then you're wrong.

I'll make $$ any way I can. I'm not too proud to use 'funds' when appropriate.
But I'll choose my entry/exit points, thanks.
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Thanks for your comprehensive reply and the specific related data.

You make a strong connection between between risk of a given protfolio and its ROI. Your division of total capital into the three venues probably satisfies a lot of wealth building goals for you.

It is very possible to consider wealth building from alternative viewpoints than the traditional one you have articulated and follow. To say that these traditions are entrenched is an understatement.

You can easily imagine how any person who does not share those views feels while circulating in the domain of these practitioners.

As an entrenched sailor who never misses a Block Island or Edlu (sp?) it was always fun to pass the time as an invited strategist to debate the traditions.

I still revere having experienced the financial transitions from pre computer to computer mainfraimes to PC dominated global orientaions. The pre quant world was something to behold where the traitions you speak of came into prominence.

It definitely was a C+ history Ivy league world for striving for striving for the ultimate balance in everything. My daughter swiped my wooden shaft putter and would never concede it back to me. It was the "right' putter for her.

My view is this. A person can go through a congent reasoning process to escape these traditions. The fact that university X's tenured Professor comes to a conclusion using a comparitive analysis of two wrong minded subjects does not prevent one of his protogeges from escaping his confines. todays or tomorrow's Nobel prizes will go to these escapees, I believe.

Being told that I am going to learn my lesson by stars of the industry, was and is conventional I guess.

For me, I could just never refrain from the logic that I perceived. It is my perception that the best investments are attained from the best opportunities. Best opportunities are defined by quality assessment.

The PC has lead to the entry of the public into investing, where heretofore it was the domain of the few. Letting the heritage issues fall away and not be a foundation of investing based upon tradition, led to two paths. Quants and the man in the street are moving to the STREET and beginning to occupy niches. I left the scene of tradition and saw that mainframes could handle data and simply tried to use an 024 to punch out daily decks to deal with daily price movement in the markets. Punching was an exercise in futility compared to using brownlines and a pencil.

It is something like being an engineer just out of school and having been told how to read the WSJ (by a prof at that engineering school) and seeing a light bulb go on for "making money" all in the context of the NY Social Register and its traditions for wealth.

I recommend to anyone to simply use their talents to discover and learn about making money considering the potential of the markets to give it to you (or allow you to take out the potential the market offers).


The money is there continually and irrefutably by any quality statistical or finacially measured manner. Poor analysis and measurement yields accordingly.

Once the traditional approaches are mapped onto the market universe, you can see that the alternative spaces for high money velocity wealth building may or may not overlap. Considering market shares vis a vis trades completed by a particular venue, it turns out that various approaches do not compete for wealth protions and upper trade limits quantification has only to do with the approaches strategies.

So all of this shows that market risk is not a function of the market's operation but merely a function of the trader's approach. Specifically in an approach the risk comes down to the rules for remaining in the market as the market behaves.

Any approach that is designed to meet a goal of high money velocity for wealth build automatically goes to areas on the universe that eliminate all risks while being in the market.

Once you invent five or so tools for handling this in the application of a given approach, they handle most of the use of capital over time in the markets.

Make a list of a 100 inventions and see how they are distributed by use over the universe of the markets and the approaches for those parts of the markets universe.

As an example, take DELL. I advocate that it is good for about 60 to 70% a year for capital appreciation. Therefore, I cannot make it part of my list for investing since it does not perform adequately. Other do use it to make profits, however.

It could be used in all three of the partitions mentioned by drS that I am responding to. Each would make differing levels of ROI/per year. Personally, I cannot stand the risk of any of those three situations; nor could I settle for only 70% a year from DELL.

I am attaching, once more a possible way to approach this. No one can easily reason a pathway to the traditional approaches of the industry.
 

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Quote from Sparohok:

Bullshit. Talk about dumb; I can't believe on a message board of so called "Elite Traders" nobody knows even the most basic financial economics.

malaka56 asks, in essence, why can't all institutional investors earn fantastic market beating returns. The reason is because it is impossible. For any investor to beat the market, there must be another investor underperforming the market. Institutional investors control a majority of securitized wealth, so in order to beat the market, they have to be taking money from each other. They can't all win.

The only way to consistently earn enormous market beating returns is to find a way to consistently exploit the poor investing decisions of a other people. Leverage, for example, is simply a way of increasing the number of dumb people you can bet against. Eventually, with enough success or enough leverage, even the smartest investor will run out of dumb counterparties.

It is mathematically inevitable that huge returns can only be accomplished with a small proportion of market wealth. Thus, any sufficiently successful strategy will eventually outgrow its success and end up earning boring, pedestrian, mutual fund returns.

Comparing traders in contests with real money managers is a joke.

Martin
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You're funny. The fact that you put that much thought into it shows that you do not fully understand. Yes I am being general and not absolute, of course there are a few select funds that are excellent even over long term.

The average Joe Shmoe invests in the market through mutual funds & pension funds. There are more mutual & pension funds out there than stocks. Been saturated like that for a while and by far, most investment of the mass money in this country is done through mutual funds & pension funds. (let's exclude the recent fad of hedge funds).

Money of the masses is dumb money. That's how markets work. You can extrapolate further going into the mechanics of the mutual fund compensation structure and the dynamics of moving large funds in the market but it all leads to the same conclusion.
 
Hydro's right.

They have basic indicators showing the flow of cash into the mutual funds and its at a 5 or 7 year high, and we're also past the peak of the SP500. Always happens, dumb money chases after money's been made.

For trading systems, if you run $1 billion you can get 30-40% annually out of the SP500 but if you run $50 billion you'd be hard pressed to get 25%. Anyone have any data on the decline of returns as capital increases?
 
Quote from Sparohok:

Thought? I'm regurgitating basic financial economics. This stuff is 40 years old. What makes me think twice is that you don't even recognize it.

http://www.stanford.edu/~wfsharpe/art/active/active.htm

Martin
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He was telling you that you are way off base and have a very distorted view of things.

this means that you are not well read and that you have, in effect glommed onto something that is relatively uniportant and think that it is important.

read 1,000 posts here and see if you can find out that most people are also in the same boat that you are in.

this will be tough for you to take or even understand. Don't worry about it. Most people have a very long way to go too.

Read Bogle on Bogle as a primer on some of the things you have not sorted out.
 
Quote from psytrade:

Hydro's right.

They have basic indicators showing the flow of cash into the mutual funds and its at a 5 or 7 year high, and we're also past the peak of the SP500. Always happens, dumb money chases after money's been made.

For trading systems, if you run $1 billion you can get 30-40% annually out of the SP500 but if you run $50 billion you'd be hard pressed to get 25%. Anyone have any data on the decline of returns as capital increases?
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The family of curves are not as you would expect. your data points may be a little out of wack.
 
Quote from Sparohok:

Thought? I'm regurgitating basic financial economics. This stuff is 40 years old. What makes me think twice is that you don't even recognize it.
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Like I said, you're putting too much thought into it, the answer is simple. I do not necesarily disagree with the economic studies or the numbers that can break down the dynamics behind moving large capital, I just point to the obvious outcome.

The markets are not academic and never will be. Financial economics still try to push the idiotic efficient market hypothesis. It's just dumb money & smart money, the poor and the rich, fear and greed. Just different variations of the tools & tricks used every generation.
 
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