KRV;7131Nattusbs, No offense to your investment skills, I think you may be splitting hairs here. We are talking about a fundamental attitude and maturity that is inherently wealth-building vs. a short-term trading mentality. Whether a broadly diversified portfolio of index funds developed according to one's risk profile meets, beats or lags your CAGR is not relevant IMO. My portfolio CAGR is 16.2% and is comprised almost entirely of index funds with a portfolio beta that I am confortable with. So what? All this does not help people who don't even know the ABC's of AAP!
We are talking about reaping 80% of rewards by putting in just 20% of the effort. Yes, it is possible to improve upon the 80% as you have done, but that's not the point here.[/quote]
KRV, There seems to be a lesson in the exchange for me. So let me ask a question. Or two. How are Index funds better than Mutual Funds? Are one to be preferred over the other? What are the benefits and drawbacks? If this has been discussed elsewhere before, I apologize. Please post a link if you have one handy. Thanks!
Index Funds
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Chicago Desi
- Posts: 1642
- Joined: Tue Jan 23, 2007 1:24 am
Index Funds
Index Funds
CD,
I will add my comments later. KRV will respond also. Here are a couple of threads that I pulled out after some search on the MSN finance forum.
Index funds thread 1
Index funds discussion thread 2
I will add my comments later. KRV will respond also. Here are a couple of threads that I pulled out after some search on the MSN finance forum.
Index funds thread 1
Index funds discussion thread 2
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Chicago Desi
- Posts: 1642
- Joined: Tue Jan 23, 2007 1:24 am
Index Funds
Desi;7143CD,
I will add my comments later. KRV will respond also. Here are a couple of threads that I pulled out after some search on the MSN finance forum.
Index funds thread 1
Index funds discussion thread 2
[/quote]
Thanks so much for your quick response! I will read through these threads and post questions I may have.
Index Funds
Nattusbs, Thank you and I agree with the value maximizing approach from your perspective. What I am amazed in my social network is when I see otherwise sensible people who believe in value-maximization - and some of whom are definitely smarter than me - get blind-sided when it comes to investing.
cool_r2i: I hope you visited my blog. I would appreciate if you could write comments directly below my posts in my blog so that I can improve on the content. The more comments I get, the better I will understand if my ramblings can be improved.
CD: Desi has posted some good links for you to peruse. Let me start by saying I am not against active management. I am a believer in the semi-strong form (unlike the strong form that most academics swear by) of the Effficient Market Hypothesis. I see increasing evidence that the capital markets are moving towards greater efficiency. Nevertheless, I firmly believe that some carefully chosen active funds, especially in less efficient emerging markets, or some well-timed sector ETFs in developed markets, can add to the returns of a 100% diversified index portfolio. But this is like putting icing on the cake, when most of us don't know how to even bake the cake. Getting to a diversified 100% low cost index portfolio is itself a major accomplishment because to do that means you understand the basic tenets of investing: a) that the evidence for indexing the core holdings of any portfolio is strong (index funds beat 50-80% of actively managed funds in most equity classes)
b) that costs are certain and returns are uncertain, regardless of how the money is managed
c) and that you don't go by emotions when it comes to investing. Indexing by its very nature creates a certain "objectivity" in your mind. This objectivity allows you to implement a disciplined DCA, which is a proven strategy for long term wealth creation.
Most experts in this forum are long term wealth builders, and they espouse these principles in the many posts they contribute. What I have written here is what they have long practiced. If we dig through their detailed metholodology postings, under Master Threads, you will be rewarded...over time! I cannot think of a better ROI for any novice investor than spending a couple of hours reading through the basics of investing mentioned in the Master Threads.
cool_r2i: I hope you visited my blog. I would appreciate if you could write comments directly below my posts in my blog so that I can improve on the content. The more comments I get, the better I will understand if my ramblings can be improved.
CD: Desi has posted some good links for you to peruse. Let me start by saying I am not against active management. I am a believer in the semi-strong form (unlike the strong form that most academics swear by) of the Effficient Market Hypothesis. I see increasing evidence that the capital markets are moving towards greater efficiency. Nevertheless, I firmly believe that some carefully chosen active funds, especially in less efficient emerging markets, or some well-timed sector ETFs in developed markets, can add to the returns of a 100% diversified index portfolio. But this is like putting icing on the cake, when most of us don't know how to even bake the cake. Getting to a diversified 100% low cost index portfolio is itself a major accomplishment because to do that means you understand the basic tenets of investing: a) that the evidence for indexing the core holdings of any portfolio is strong (index funds beat 50-80% of actively managed funds in most equity classes)
b) that costs are certain and returns are uncertain, regardless of how the money is managed
c) and that you don't go by emotions when it comes to investing. Indexing by its very nature creates a certain "objectivity" in your mind. This objectivity allows you to implement a disciplined DCA, which is a proven strategy for long term wealth creation.
Most experts in this forum are long term wealth builders, and they espouse these principles in the many posts they contribute. What I have written here is what they have long practiced. If we dig through their detailed metholodology postings, under Master Threads, you will be rewarded...over time! I cannot think of a better ROI for any novice investor than spending a couple of hours reading through the basics of investing mentioned in the Master Threads.
Index Funds
Chicago Desi;7137 KRV, There seems to be a lesson in the exchange for me. So let me ask a question. Or two. How are Index funds better than Mutual Funds? Are one to be preferred over the other? What are the benefits and drawbacks? If this has been discussed elsewhere before, I apologize. Please post a link if you have one handy. Thanks![/quote]
This thread has taken many turns and twists, so one more won't hurt.
CD, I gave you a couple of links earlier which were threads on R2IFinance forum on MSN.
Now I am giving you one more very good link which follows the quotes here. In the next post, I will provide some more very good links and then maybe a brief note from me.
" Most investors are pretty smart. Yet most investors also remain heavily invested in actively managed stock funds. This is puzzling. The temptation, of course, is to dismiss these folks as ignorant fools. But I suspect these folks know the odds are stacked against them, and yet they are more than happy to take their chances."Jonathan Clements; The Wall Street Journal, February 27, 2001
" The deeper one delves, the worse things look for actively managed funds."William Bernstein, The Intelligent Asset Allocator
"..the best way to own common stocks is through an index fund..."Warren Buffett, Berkshire Hathaway, Inc. 1996 Shareholder Letter
http://www.ifa.com/12steps/step1/
Index Funds
Why Index?
http://www.moneychimp.com/
From Money Chimp link above
http://www.moneychimp.com/articles/index_funds/why_index.htm
Why index investing makes sense...
Whatindexes and index funds are...
Howto build a simple portfolio...
...and a tiny list of index funds and ETFs.
Small Value is Good
(or is it?)
CHECK OUT THE LINKS HERE - CLICK
The following links are links from Money chimp and to their website. They provide good education.
MPT Introduction
Volatility and Time
Efficient Frontier
Sharpe Ratio
Build a Portfolio
Index Investing
CAPM, Beta
Alpha, R-Squared
Three Factor Model
Insurance Analogy
Conclusions
Books & Links
http://www.moneychimp.com/
From Money Chimp link above
http://www.moneychimp.com/articles/index_funds/why_index.htm
Why index investing makes sense...
Whatindexes and index funds are...
Howto build a simple portfolio...
...and a tiny list of index funds and ETFs.
Small Value is Good
(or is it?)
CHECK OUT THE LINKS HERE - CLICK
The following links are links from Money chimp and to their website. They provide good education.
MPT IntroductionVolatility and TimeEfficient FrontierSharpe RatioBuild a PortfolioIndex InvestingCAPM, BetaAlpha, R-SquaredThree Factor ModelInsurance AnalogyConclusionsBooks & LinksIndex Funds
Why should I Index?
Speculators and arbitrageurs bid up (or down) the price. Any information about these new contracts, products, etc is priced into the stock to the extent known. Any new information hits the market at the same time and it would be difficult to take advantage of that information. For every two or three investors who are gung ho about a particular stock, there is an equally enthusiastic bear who is shorting the stock.
The above process basically says markets are efficient and stocks cannot really be cherry picked.
Once we accept the above hypothesis, then the question arises is that if stocks cannot be picked, why should investors pay millions to the Mutual fund manager and his staff for buying and selling stocks. These costs lower the net performance as costs are pulled out of the assets.
A mutual fund manager may have a staff of 10 and offices in some ritzy building. They may be travelling often. All these are costs investors of managed funds have to bear. In addition, the trading in and out costs money also and this further hurts your fund performance. There are trading costs. Costs associated with tax inefficiency as all this trading results in taxable events.
So if unmanaged basket of stocks is the way to go, then the next question arises is hwo to pcik that basket. Should I plunk equal money into the the Taco Joint by Jose and into IBM? Why or why not? This is where market capitalization based weighting comes in. It has been shown that smaller the company, greater is the risk. The local cleaners shop could easily go bankrupt but not IBM, GE or Microsoft. The local cleaners may also out perform a larger company. But, the larger the company, the more resoources they have at their disposal to figure ways to make money, smaller companies do not have that many resources.
There are other issues such as when investing - is the focus to manage risk or chase performance and growth. The cardinal rule of investing is to manage risk first.
Having said all of the the above, where do I personally stand? Well, we will leave that for some other day.
I think 99.9% of investors should heed to above.
Not indexing implies that I can pick stocks that will outperform the market.
What special insight do I have that will allow me to identify a company that will beat the market?
No matter how knowledgeable I may be about a particualr sector or field, there are others who are more knowledgeable than me.
So whatever knowledge I may have about a company ABC, there are others who know more about it than I do.
If this knowledge is not my exclusive knowledge than enough others know about it, whcih includes the analysts whose full time job is to cover the company ABC.
If it is known that the company will outperform the market, then would its price be not bid up? Yes it would. There are enough people with money looking for sure shot opportunities. If the price is bid up then all the supposed out performance is gone.
The above says, that all the known information about a company including inside information is priced into the stock
It also says you cannot really cherry pick stocks based on some specialized exclusive knowledge or information that you have.
Speculators and arbitrageurs bid up (or down) the price. Any information about these new contracts, products, etc is priced into the stock to the extent known. Any new information hits the market at the same time and it would be difficult to take advantage of that information. For every two or three investors who are gung ho about a particular stock, there is an equally enthusiastic bear who is shorting the stock.
The above process basically says markets are efficient and stocks cannot really be cherry picked.
Once we accept the above hypothesis, then the question arises is that if stocks cannot be picked, why should investors pay millions to the Mutual fund manager and his staff for buying and selling stocks. These costs lower the net performance as costs are pulled out of the assets.
A mutual fund manager may have a staff of 10 and offices in some ritzy building. They may be travelling often. All these are costs investors of managed funds have to bear. In addition, the trading in and out costs money also and this further hurts your fund performance. There are trading costs. Costs associated with tax inefficiency as all this trading results in taxable events.
So if unmanaged basket of stocks is the way to go, then the next question arises is hwo to pcik that basket. Should I plunk equal money into the the Taco Joint by Jose and into IBM? Why or why not? This is where market capitalization based weighting comes in. It has been shown that smaller the company, greater is the risk. The local cleaners shop could easily go bankrupt but not IBM, GE or Microsoft. The local cleaners may also out perform a larger company. But, the larger the company, the more resoources they have at their disposal to figure ways to make money, smaller companies do not have that many resources.
There are other issues such as when investing - is the focus to manage risk or chase performance and growth. The cardinal rule of investing is to manage risk first.
Having said all of the the above, where do I personally stand? Well, we will leave that for some other day.
I think 99.9% of investors should heed to above.
Index Funds
Desi #41:
Sorry to disagree, but you wrote:
Not indexing implies that I can pick stocks that will outperform the market.
No, not indexing does not mean stocks, but MF's. Big difference.
Cheers
Nattusbs
Sorry to disagree, but you wrote:
Not indexing implies that I can pick stocks that will outperform the market.
No, not indexing does not mean stocks, but MF's. Big difference.
Cheers
Nattusbs
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skepticmystic
- Posts: 27
- Joined: Wed Feb 14, 2007 4:14 am
Index Funds
Folks, I am new to this forum, just joined last week. But I am already hooked! Really good discussions going on here.
I am guessing AAP stands for Asset Allocated portfolio? Google isnt helping. btw, I see so many acronyms being used on this site, makes me wish there was a master list somewhere.
In case AAP is what I think, I would recommend this site: http://www.fundadvice.com/index.php from Paul Merriman who runs his own money mgmt firm.
They have suggested buy and hold portfolios for different brokerages here.
The theory is very well explained in these two articles:
Buy and hold strategy
and
Fine tuning your asset allocation
btw, I also noticed that he highly recommends DFA as in KRV's blog.
I am guessing AAP stands for Asset Allocated portfolio? Google isnt helping. btw, I see so many acronyms being used on this site, makes me wish there was a master list somewhere.
In case AAP is what I think, I would recommend this site: http://www.fundadvice.com/index.php from Paul Merriman who runs his own money mgmt firm.
They have suggested buy and hold portfolios for different brokerages here.
The theory is very well explained in these two articles:
Buy and hold strategy
and
Fine tuning your asset allocation
btw, I also noticed that he highly recommends DFA as in KRV's blog.
Index Funds
Nattusbs;7242Desi #41:
Sorry to disagree, but you wrote:
Not indexing implies that I can pick stocks that will outperform the market.
No, not indexing does not mean stocks, but MF's. Big difference.
Cheers
Nattusbs[/quote]
How does a MF outperform the market when it does?