The advice against trying to beat the market is based on the fact that there are tens of thousands of highly intelligent people paid to analyze securities, and they're all feeding off each other's behavior. To beat the market, you have to beat a conventional wisdom based on the accumulated expertise of a lot of people. For instance, if you want to buy stock in a Malaysian steel company, you have to decide that you un…
Or maybe the "analysts" are just not any good. For a specific example, look at how the "hobbyists" are beating the "professional" analysts at predicting Apple's quarterly performance, time and time again. http://tech.fortune.cnn.com/2010/04/20/apples-blow-out-quart...
If there's one company where hobbyists will beat professionals, it's Apple. Do you have any other examples?
true, you get this advice everywhere. but actually implementing it for realz isn't for the faint of heart. it's not impossible either, especially if you don't mind horseshoes-and-hand-grenades approximation. If you want optimal as in mathematically optimal fund selection, then Bill Sharpe's startup, Financial Engines, does that (if you have at least $100k at Vanguard, you get it for free, also through many employers)…
I've come to be suspicious of anything in finance claiming to be "mathematically optimal". You can only optimise according to some simplified model, and simplified models of complex systems have a tendency to unpredictably break down.
Don't throw out the baby with the bathwater. Just because you have a large industry of sharks doesn't mean the good work being done by reputable investment houses is invalidated.
In general, index funds work. Some are better than others because of fees or their stock selection process. But they do work. The reason is that stocks in a sector have high covariance, and the outliers that might pop up occasionally with low covariance are only a small part of the index anyway. It is trivially easy to optimise on variance with some goal such as a limit on the number of holdings.
A well-written article, but really? Investing in a low-cost broad index fund is the /only/ investment advice I get nowadays.
true, you get this advice everywhere. but actually implementing it for realz isn't for the faint of heart. it's not impossible either, especially if you don't mind horseshoes-and-hand-grenades approximation. If you want optimal as in mathematically optimal fund selection, then Bill Sharpe's startup, Financial Engines, does that (if you have at least $100k at Vanguard, you get it for free, also through many employers)…
> (if you have at least $100k at Vanguard, you get it for free, also through many employers)
Actually, the people my employer go through just dumped Vanguard and a few other funds and would've automatically enrolled us all in a fund that changes every single year to be "optimum" for your age.
I opted out and I informed my coworkers that there were good reasons to be incredibly suspicious of this move, but I wonder who actually took my advice.
All I could think was that they were going to churn everyone's funds every single year so that they could get huge fees under the guise of "optimizing" our portfolios.
> "it's impossible to time the market" That depends very much on exactly what you mean by "time the market" . It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense. Bu…
Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
It should be noted that your 10, 20, and 30 year charts actually show an advantage to investing in off years; your conclusion that "there is no significant advantage" is mistaken.
On the 30 year chart, the peaks on the 20-50% line are a couple percent above the peaks on the all line. Boosting returns from 7% to 9% over 30 years, or from 12% to 14% over 30 years, results in over 70% more total wealth after compounding. The visual difference is not as striking on the 30 year chart as on the 5 year chart, but that's because you're presenting annualized rather than total returns.
> "it's impossible to time the market" That depends very much on exactly what you mean by "time the market" . It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense. Bu…
Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
The argument against market timing I've always liked comes from Malkiel's Random Walk:
> During the decade of the 1980s, the Standard & Poor's 500 Index provided a very handsome total return (including dividends and capital changes) of 17.6 percent. But an investor who happened to be out of the market and missed just the ten best days of the decade—out of a total of 2,528 trading days—was up only 12.6 percent. [...] market timers risk missing the infrequent large sprints that are the big contributors to performance.
Agreed - I believe there are some ways to time the market. For example, if you want to make a 5-10 year investment, then doing so in the S&P500 when it is significantly down will yield better returns (on average) than doing it at a random time: http://saffell.wordpress.com/2008/10/26/does-timing-the-mark...
The argument against market timing I've always liked comes from Malkiel's Random Walk : > During the decade of the 1980s, the Standard & Poor's 500 Index provided a very handsome total return (including dividends and capital changes) of 17.6 percent. But an investor who happened to be out of the market and missed just the ten best days of the decade—out of a total of 2,528 trading days—was up only 12.6 percent. [...]…
The "ten best days" argument is a good argument against short-term timing (you could, at random, miss just those 10 days and nothing else if you're trying to guess good and bad days.) But it's not a very good argument against the particular type of long-term timing discussed in this sub-thread. The 10 best days tend to be clustered somewhat, but often interspersed with several bad days; if you're simply looking for a good price and then buying, you're not going to miss the 10 best days without also missing a large number of bad days. Missing both the best and worst 10 days of the decade gives you almost exactly average returns. Furthermore, the 10 best days tend to occur in the "short sprints" that follow a down market; the strategy described above says to buy in to a down market, which means you'd hit most of those 10 best days -- and, quite likely, miss at least a few of the 10 worst days, generating net above-average returns. (The parent post's graphs showed this exact result: buying into the market after a largeish downturn gets you great returns, long term.)
Index funds seem to me to work by reducing churn - the percentage of your stock that is sold and bought each year - because every time you sell then buy you lose a lot of money. I am not yet convinced you have to follow an index.
If you had a fund that did not sell anything and bought a random stock from an index as funds came in would this beat an index fund?
Index funds seem to me to work by reducing churn - the percentage of your stock that is sold and bought each year - because every time you sell then buy you lose a lot of money. I am not yet convinced you have to follow an index. If you had a fund that did not sell anything and bought a random stock from an index as funds came in would this beat an index fund?
Think of the index fund as reducing the risk of depending on any one stock for your gains. I don't know what the distribution of gains is like on an index fund but an answer to your question would likely come from an examination of one.
“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” - Warren Buffet