Two good pieces in todays WSJ. The first is from Jason Zweig's column. He profiles the investor John Laporte. The secret to Laportes success? minimal trading. This complements one of the ideas discussed in the March 4 post - that those who tame their reflexive brain and trade less tend to perform better:
The second article discusses the growing movement to lower 401K fees.
http://online.wsj.com/article/SB10001424052748703943504575095632895464968.html?mod=WSJ_hps_MIDDLEThirdNews
When investing in index funds, do you eliminate the possibility of becoming victim of market and macro-economic timing? Does it allow for inexperienced investors to generate market returns by simply adhering to a passive investment strategy of index funds? Absolutely not. No matter what your investment style is; actively managed mutual funds, index funds or individual stock portfolio, it requires a professional advisor that can recommend the best strategy to maximize your returns on a risk-adjusted basis. For example, look at the effect that after-hours trading has had on the market. In March 2006, S&P announced Google will be added to the S&P 500 index. Google subsequently jumped 7.6% in after-hours trading prior to even joining the index. Investors of S&P 500 index actually fell victim to the benefits of the popularity of the index. Does this mean investing in index funds will lag the market? No, quite the opposite. There is a complete universe of index funds that can capture the entire equity market, foreign and domestic. However, what it does mean is that when investing in index funds, inexperienced investors can not get away with managing their own portfolio without professional help. Index funds require professional, experienced advisors who can advise each client the best fund based on their investment objective. This is the only way to beat market on a risk adjusted basis.
ReplyDeleteI agree with you Andrew. I do not advocate that merely owning index funds is an investment strategy. Modern Portfolio Theory shows that there are historic combinations of investments that are efficient - best return for a given amount of risk. Most investors need a professional advisor to help them determine the structure of their portfolio based on their investing needs and to keep them on track once they commit to a portfolio.
ReplyDeleteI advocate using index funds wherever possible once the composition of the portfolio is determined.
In my practice I will consider a clients time horizon, risk capacity, and risk tolerance when recommending a portfolio. I will then show the client how much that portfolio could lose in a year to determine whether they are comfortable. Once the client is comfortable with a portfolio then I use index funds to build the portfolio.
As well, when advising on pension plans I recommend to the employer that the plan offer set portfolios to help guide the employees. Because employees, when left with just a list of mutual funds, whether actively managed or indexed tend, to to be poor investors.