3 ms·

I looked into this awhile back and quickly came to the conclusion, based on the several books I read, that it's silly to try to beat the market long term. "The

by mullr 18y ago

I looked into this awhile back and quickly came to the conclusion, based on the several books I read, that it's silly to try to beat the market long term. "The Intelligent Investor" is the one that laid it out clearly to me. The main point is: the performance of narrow investments (specific stocks) can't be reliably predicted, but the market as a whole tends to grow over time. Therefore, invest in the market as a whole. (== S&P index fund)

epi0Bauqu 18y ago
I am also a passive investor trying to capture full market returns. However, just investing in stocks exposes one to too much risk with no more return than if you spread your money across many asset classes that move in different directions at any given time. The Benefits of Low Correlation is a good summary: http://www.indexuniverse.com/component/content/article/6/3220.html?issue=121&magazineID=2&Itemid=11 http://www.indexuniverse.com/component/content/article/6/322... And here is a summary of the summary: http://articles.moneycentral.msn.com/RetirementandWills/RetireInStyle/BuildAStableRetirementPortfolio.aspx http://articles.moneycentral.msn.com/RetirementandWills/Reti... And here is the highlight of the summary of the summary: His two-asset portfolio -- 50-50 U.S. large- and small-cap stocks -- produced an annualized internal rate of return of 10.74%. But it lost a deadly 30.8% in its worst year. His seven-asset portfolio -- equal portions of U.S. large- and small-cap stocks, international stocks, U.S. intermediate fixed-income investments, cash, REITs and commodities -- provided an 11.25% return. But the worst-year loss was only 10.2%.
- Xichekolas 18y ago
  Thanks for the good links. I was just wondering, what does the worst one year loss matter if you are investing over 30 years? The annualized rates given were positive, and the better one happened to have a smaller worst year number, but it shouldn't really matter. If a fund returns 13% annualized but had one year where it lost 90% of value (hypothetical here), I'd still choose it for the 13%. I can see how this would matter if you are actively drawing on the funds... then a high volatility portfolio could be stressful and possibly dangerous, but if you are looking at a 30 year timeline, it doesn't matter.
  - epi0Bauqu 18y ago
    It matters for two reasons. First, it gives some people (including myself) peace of mind that without it might otherwise prevent investment in some of these vehicles. Second, you will probably draw down (or switch into less volatile investments) eventually, and so it ups the probability that when you do you so all will be OK. Of course, it also yields higher returns on average, so it is a win-win really.
raju 18y ago
Index funds are the way to go. They are a passive instrument, so you cannot (should not) be actively trading them. When you put money in an index fund, you essentially buy shares of that fund (along with several others). There is a fee attached to every trade, and that fee is consumed by all share holders equally. So most index funds will penalize you for trading those shares actively. The way I look at it, an index fund (like S&P index fund) is merely a layer of abstraction over trading stocks. But instead of putting all your money in one stock, the index fund divies up your money across many different companies and sectors in the same ratio as the target index. This protects you from major fluctuations in the market, so in the long term you essentially grow at the same rate as the index. On the flip side, if one of those companies sees astronomical growth, you won't see the same growth. [All: This is my understanding of index funds, so if I am wrong, please, do correct me] There are several good books in the market if you want to go down this route, including the aforementioned "The Intelligent Investor" [must read] and "A random walk down wall street" Another book that I surprisingly found to be very good was "Mutual funds for dummies" [http://tinyurl.com/5ulpvw http://tinyurl.com/5ulpvw][The other book "Personal finance for dummies" by the same author is a good book too. There is another one [http://tinyurl.com/5wso5z http://tinyurl.com/5wso5z] that is short and sweet to read. Good luck!
- Retric 18y ago
  I would avoid buying a single index fund though. I go with small cap growth funds 50% US, 25% Europe, 25% Asia and rebalance them every 6 months. PS: Outside of a Roth IRA / 401k rebalancing stocks has some negative tax consequences so it's better to change what your buying than sell off existing stock.
ovi256 18y ago
Philip Greenspun (of Ars Digita fame) wrote a great guide on the subject: http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money He recommends index funds too, and explains the choice.

by mullr 18y ago

epi0Bauqu 18y ago

I am also a passive investor trying to capture full market returns. However, just investing in stocks exposes one to too much risk with no more return than if you spread your money across many asset classes that move in different directions at any given time. The Benefits of Low Correlation is a good summary: http://www.indexuniverse.com/component/content/article/6/3220.html?issue=121&magazineID=2&Itemid=11 http://www.indexuniverse.com/component/content/article/6/322... And here is a summary of the summary: http://articles.moneycentral.msn.com/RetirementandWills/RetireInStyle/BuildAStableRetirementPortfolio.aspx http://articles.moneycentral.msn.com/RetirementandWills/Reti... And here is the highlight of the summary of the summary: His two-asset portfolio -- 50-50 U.S. large- and small-cap stocks -- produced an annualized internal rate of return of 10.74%. But it lost a deadly 30.8% in its worst year. His seven-asset portfolio -- equal portions of U.S. large- and small-cap stocks, international stocks, U.S. intermediate fixed-income investments, cash, REITs and commodities -- provided an 11.25% return. But the worst-year loss was only 10.2%.

Xichekolas 18y ago
Thanks for the good links. I was just wondering, what does the worst one year loss matter if you are investing over 30 years? The annualized rates given were positive, and the better one happened to have a smaller worst year number, but it shouldn't really matter. If a fund returns 13% annualized but had one year where it lost 90% of value (hypothetical here), I'd still choose it for the 13%. I can see how this would matter if you are actively drawing on the funds... then a high volatility portfolio could be stressful and possibly dangerous, but if you are looking at a 30 year timeline, it doesn't matter.
- epi0Bauqu 18y ago
  It matters for two reasons. First, it gives some people (including myself) peace of mind that without it might otherwise prevent investment in some of these vehicles. Second, you will probably draw down (or switch into less volatile investments) eventually, and so it ups the probability that when you do you so all will be OK. Of course, it also yields higher returns on average, so it is a win-win really.

raju 18y ago

Index funds are the way to go. They are a passive instrument, so you cannot (should not) be actively trading them. When you put money in an index fund, you essentially buy shares of that fund (along with several others). There is a fee attached to every trade, and that fee is consumed by all share holders equally. So most index funds will penalize you for trading those shares actively. The way I look at it, an index fund (like S&P index fund) is merely a layer of abstraction over trading stocks. But instead of putting all your money in one stock, the index fund divies up your money across many different companies and sectors in the same ratio as the target index. This protects you from major fluctuations in the market, so in the long term you essentially grow at the same rate as the index. On the flip side, if one of those companies sees astronomical growth, you won't see the same growth. [All: This is my understanding of index funds, so if I am wrong, please, do correct me] There are several good books in the market if you want to go down this route, including the aforementioned "The Intelligent Investor" [must read] and "A random walk down wall street" Another book that I surprisingly found to be very good was "Mutual funds for dummies" [http://tinyurl.com/5ulpvw http://tinyurl.com/5ulpvw][The other book "Personal finance for dummies" by the same author is a good book too. There is another one [http://tinyurl.com/5wso5z http://tinyurl.com/5wso5z] that is short and sweet to read. Good luck!

Retric 18y ago
I would avoid buying a single index fund though. I go with small cap growth funds 50% US, 25% Europe, 25% Asia and rebalance them every 6 months. PS: Outside of a Roth IRA / 401k rebalancing stocks has some negative tax consequences so it's better to change what your buying than sell off existing stock.

ovi256 18y ago

Philip Greenspun (of Ars Digita fame) wrote a great guide on the subject: http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money He recommends index funds too, and explains the choice.