Don't buy index trackers.........for my sake

bostonerimus

As a long time investor in index trackers I've benefited from all the active investors and managers setting a market for me to average. But what if everyone was just buying the index, how would the market function....well it wouldn't. So for my sake please go out and spend your money on active investing so that my strategy will continue to work. Of course that's a bit hyperbolic, but if you are indexing it's good to realize without active trading we wouldn't be able to successfully index.

http://www.marketwatch.com/story/john-bogle-has-a-warning-for-index-fund-investors-2017-06-01
http://www.morningstar.com/cover/videocenter.aspx?id=768505

username12345678

I'm not a blind devotee to passive index investing - my only concern is positioning my investments to give them the best chance of generating the returns for my risk tolerance.

I've spent I don't know how many hours reading articles and interviews with leading investment industry figures who make it pretty clear that over the long-term a low cost indexing investment methodology gives the typical investor the best chance of achieving their aims.

That doesn't mean I don't recognise that some actively managed funds can outperform their benchmarks for a number of years. That said, years of research have shown that the best indicator of long term future returns is the fees you pay to access the market - and fees are the only thing you can be sure of.

However, after seeing the asset class returns table showing the random distribution of winners and loser over an extended period I remain to be convinced that anybody really knows what they are doing.

Why then wouldn't you want to spread your money across the whole investment 'universe' in equities/bonds/property etc?

Any other method of investing is akin to claiming you have some insight that tens of millions of other financial experts and amateur investors don't have - can you really claim that?

MPN

username12345678 wrote: »

Why then wouldn't you want to spread your money across the whole investment 'universe' in equities/bonds/property etc?
Any other method of investing is akin to claiming you have some insight that tens of millions of other financial experts and amateur investors don't have - can you really claim that?/QUOTE]

I myself prefer to keep a very good cash reserve in case of a downturn/crash which is spread over the best savings accounts and regular savers instead of investing in bonds and property. Therefore my investment portfolio is now 100% equity which I realise will not be suitable for most people.

BLB53

I don't think you have too much to be worried about. Most people are hard-wired to compete and think they can do much better than 'average' and that's not likely to change anytime soon.

Linton

username12345678 wrote: »

Why then wouldn't you want to spread your money across the whole investment 'universe' in equities/bonds/property etc?
........

Any other method of investing is akin to claiming you have some insight that tens of millions of other financial experts and amateur investors don't have - can you really claim that?

I cant see that going for the index indicates much insight. Let's look at the FTSE100 since the data's easily available. Why would you want to put 3 times as much money into Tesco than either of Sainsbury's or Morrisons? You think it's that much a better bet? If you wanted to invest in major supermarkets wouldnt it be safer to split your investments equally? Or do you have special knowledge? You could follow the index and invest more of your money into RBS than all three supermarkets put together. Is that what you would want to do?

If you really believed in the insight of the "The Market" why are you so keen on the equities component? The bond market is about 3 times the size of the equity market. Do you have special knowledge that leads you to know better than these millions of expert and amateur investors? And then the Derivatives Market is larger than both put together....

bostonerimus

Linton wrote: »

I cant see that going for the index indicates much insight.

Exactly....going for the index is an admission that you have no insight and the best you can do is rely on the efficiency of the market. As a lapsed Methodist with Buddhist inclinations I like the "assured salvation" and liberation from too much thought that passive indexing allows......as a socialist I'm still dealing with the efficiencies of the market.

username12345678

Linton wrote: »

I cant see that going for the index indicates much insight..

I agree.

I understand that my insight is not greater than the collective insight of milllions of other investors - would you say yours was?

Linton wrote: »

Why would you want to put 3 times as much money into Tesco than either of Sainsbury's or Morrisons? You think it's that much a better bet? ...

The collective market wisdom thinks it's a better idea - if you think otherwise what insight do you have that millions of others don't?

Linton wrote: »

You could follow the index and invest more of your money into RBS than all three supermarkets put together. Is that what you would want to do?
...

What knowledge do you have that millions of others don't have that tells you that being underweight banking and overweight supermarkets is the correct move?

Linton wrote: »

If you really believed in the insight of the "The Market" why are you so keen on the equities component? The bond market is about 3 times the size of the equity market. Do you have special knowledge that leads you to know better than these millions of expert and amateur investors? And then the Derivatives Market is larger than both put together....

Now here I do agree that there is an argument for each individual assessing their risk tolerance and adjusting their asset allocation accordingly. There are lots of resources online showing drawdowns/returns for a variety of asset mixes going back almost a century.

The biggest challenge for amateur investors (myself included) is overcoming the veneer of complexity that is lacquered on liberally by the investment industry to justify enormous fees.

bostonerimus

username12345678 wrote: »

The biggest challenge for amateur investors (myself included) is overcoming the veneer of complexity that is lacquered on liberally by the investment industry to justify enormous fees.

You speak the truth........and once you can see through the smoke and mirrors it's very liberating. But the thrust of my initial post is that we don't want this to become too widely known. We need the active investors to keep the market efficiently humming along....we need those winners and losers.

Audaxer

I'm a big fan of passive index tracking as well. For those of us who are retired and wanting regular income I'm not sure a full portfolio of passive tracking is best. That's why I'm considering part of my portfolio being income-generating ITs and funds.

Linton

bostonerimus wrote: »

Exactly....going for the index is an admission that you have no insight and the best you can do is rely on the efficiency of the market. As a lapsed Methodist with Buddhist inclinations I like the "assured salvation" and liberation from too much thought that passive indexing allows......as a socialist I'm still dealing with the efficiencies of the market.

Interesting that you bring in religion. Real adherents know that they have have seen The Truth and enthusiastically take on their duty to bring it to the unbelievers. Plus there is the added reassurance of knowing that anyone who disagrees with them is deluded or sinful.

username12345678

Audaxer wrote: »

I'm a big fan of passive index tracking as well. For those of us who are retired and wanting regular income I'm not sure a full portfolio of passive tracking is best. That's why I'm considering part of my portfolio being income-generating ITs and funds.

I can understand that and i've been researching IT's as well as part of a core (passive) and satellite approach to structuring my portfolio when I start managing it myself.

As my fund allocation stands at the moment there seems to be little rhyme or reason beyond meeting the current WMA asset allocation recommendations. I've resisted the urge to ring up the investment manager to enquire why i'm in an active fund investing in the S&P500 when it's well known that it's incredibly difficult for active to overcome passive in a market that is researched to death.