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I'm Too Risk-Averse for Index Investing

paranoidvalueinvestor.substack.com

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Re: I'm Too Risk-Averse for Index Investing

#11

Post by bumby »

impostervt wrote: post #2

Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?

A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time.

So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).

Re: I'm Too Risk-Averse for Index Investing

#12

Post by joosters »

You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price.

Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).

Re: I'm Too Risk-Averse for Index Investing

#13

Post by satai »

impostervt wrote: post #2

Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?

Then just pick a value index. Or a total market index but other weight then market cap (fundamentals...).

Re: I'm Too Risk-Averse for Index Investing

#14

Post by lukeholder »

mhb wrote: post #3

Averse. It's risk averse.

Both adverse and averse are used to indicate opposition. Adverse, usually applied to things, often means "harmful" or "unfavorable" and is used in instances like "adverse effects from the medication." Averse usually applies to people and means "having a feeling of distaste or dislike." It is often used with to or from to describe someone having an aversion to something specific, such as "he is averse to taking risks" or "he is risk averse."

Re: I'm Too Risk-Averse for Index Investing

#15

Post by assbuttbuttass »

There's something really insidious about tying 401ks and other retirement accounts to the stock market. People including myself end up with a large portion of our assets essentially gambled on the future success of US corporations. It gives some false legitimacy to this idea that our media is constantly pushing, that if the stock market is going well then regular Americans are doing well.

Re: I'm Too Risk-Averse for Index Investing

#16

Post by cissou »

joosters wrote: post #12

You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price. Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).

100%. European markets are known to pay out more dividends whereas the US market is known to prioritize stock price growth. Return-wise that makes no theoretical difference.

Re: I'm Too Risk-Averse for Index Investing

#17

Post by meany »

The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors.

Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.”

He’s even putting 90% of his own estate into index funds.

https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/war...

Re: I'm Too Risk-Averse for Index Investing

#18

Post by SamBam »

armitron wrote: post #5

Makes you wonder why the 89% of fund managers that fail to beat the market don't just pick "value" stocks.

My uneducated guess is because they are driven to try and "win big," and they consistently overestimate they chances of doing so, and are uninterested in safe-but-boring.

Re: I'm Too Risk-Averse for Index Investing

#19

Post by bumby »

armitron wrote: post #5

Makes you wonder why the 89% of fund managers that fail to beat the market don't just pick "value" stocks.

I suspect there's a lot at play, including cognitive biases.

For example, value stocks tend to be contrarian plays. The stock is a good value because the price is down, meaning the majority don't have faith in it. Fund managers don't want to be holding these stocks when others are crushing it because people will look at their holdings and have FOMO. When, say, tech is flying high, people want to see that their fund manager owns tech.

Another example is leverage limits may incentivize fund managers into high-beta stocks. These are the one's that are most likely to win (or lose) by a large margin compared to the market. Over-optimism bias makes fund managers think they can disproportionately pick the winners.

Re: I'm Too Risk-Averse for Index Investing

#20

Post by gargarplex »

cissou wrote: post #16
joosters wrote: post #12

You can't look at a chart of an index price and simply say "it's down from the peak, I would have lost money". If you do that, you are forgetting that stocks pay dividends, and they aren't included in the index price. Instead, you should be looking at index tracking fund / ETF prices, which will include the value of dividends (and also account for fees).

100%. European markets are known to pay out more dividends whereas the US market is known to prioritize stock price growth. Return-wise that makes no theoretical difference.

Makes a huge difference when considering the tax implications.
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