You're thinking about some good and important issues, but I want to point out that investing is not philosophy - there are numbers we can analyze here. Your first point is theoretically true but practically impossible to implement.
Agreed
Your second point is false and, if true, would invalidate the rest of your argument. Here's an article about outflows: http://www.asianinvestor.net/article.aspx?CIaNID=79445
It just says people are pulling out, forcing mgrs to sell. Where is 120 Billion going? Or are they not adding to their portfolio?
What do you have in your portfolio?
Yes I do, thank you
How do you know these funds/managers are superior to peers?
By the funds I hold and their track record for that market space.
How do you know that historical outperformance will lead to future outperformance (it probably won't). If your funds are the best, why are other people in other funds?
Anybody can pick funds that are in the top 10% based on time in M* records..
Do you have any advantage over other sophisticated investors? Nope, there are others that do better, and some do worse.. Nothing magic here
What's your current stocks-bonds-cash allocation (put it in the M* portfolio and analyze)?
74 % intl, 5% bonds, 5% cash, rest US.
How much of this allocation is chosen by and you and how much by fund managers (i.e. do you hold a small number of go-anywhere balanced funds, or have you chosen funds that give you certain allocations to U.S. corporate bonds, international small-cap stocks, etc.?)
I would say over 50% chosen by me, due to intl portfolio, regional investments.
At what point did your managers develop their cash stakes (i.e. did they sell close to last year's highs, or did they sell yesterday?) Impossible to tell, I can judge based on yearly #'s
In a rally or a sustained bull market, how much of a drag do cash stakes create on mutual fund returns? Impossible to tell, I can judge based on yearly #'s
These questions all need to be answered numerically if your analysis is to be useful.
Please help me, since you know the answers you can enlighten me.
I can tell you that according to Bogle's "Common Sense on Mutual Funds", mutual fund managers as a group have totally failed to time the market and hold cash at the right times. Almost no one went to cash anywhere near the peak of the 90s market, and a lot of funds held cash through the recovery. You have to be right twice to profit here - get out at the right time and get back in at the right time. In between, the money is earning returns lower than historical stock market returns, especially now when MM/Treasury/legit AAA bond yields are so low. You also have to have conviction - a manager could actually underperform the market by buying heavily last year, selling off in March, buying in May, selling this week, etc. The market does not move like a seesaw - it zig-zags in ways we'll never see coming. So I guess you are saying you can personally beat the performance of the managers. How can you do this? How can you beat 300K people that work at this for 60 hrs a week for 20+ yrs?
