Buy-and-Really-Hold Will Suck Your Portfolio Dry

[Emeritus]

So, you've ruled out a way to take a portion of your assets and possibly increase your returns on those assets, and stick with an index fund?
I know I have answered my own question.

I could "Possibly" win the lottery but the odds make it unlikely. I always offer investment advisers the following deal. Ill invest with them. they absorb all the losses below the market and get half the gains as a fee. If they have a secret system that works, they will make money hand over fist.Guess what? They run away screaming that I am ignorant and don't understand the investment business.
I do understand it. That is their problem.
Heck Ill give you the same deal. Provide a suitable guarantee against loss. IE under perfroming the market. Ill invest $50,000 exactly as you say. We split the winnings and you pay the loss
If you have a magic system you will make money.

What do you say?
.

 

[robls]

I could "Possibly" win the lottery but the odds make it unlikely. I always offer investment advisers the following deal. Ill invest with them. they absorb all the losses below the market and get half the gains as a fee. If they have a secret system that works, they will make money hand over fist.Guess what? They run away screaming that I am ignorant and don't understand the investment business.
I do understand it. That is their problem.
Heck Ill give you the same deal. Provide a suitable guarantee against loss. IE under perfroming the market. Ill invest $50,000 exactly as you say. We split the winnings and you pay the loss
If you have a magic system you will make money.

What do you say?
.

I'm not asking you to invest your money that way. You have the choice to say, no thanks. And you have.
I'm asking myself, after researching this, would I be willing to put a portion (5%?) of my assets and try to outperform.
5% of 1.5 million = $75,000(not saying I have 1.5 million)
Index return after all fees = 10%(around historical return)
Relative strength return after all fees = 15%(I know this is a prediction)
That is around a $4,000 difference.
Am not saying putting all your assets this way. Understand AA, and diversification.
Rob

 

[Emeritus]

I'm not asking you to invest your money that way. You have the choice to say, no thanks. And you have.
I'm asking myself, after researching this, would I be willing to put a portion (5%?) of my assets and try to outperform.
5% of 1.5 million = $75,000(not saying I have 1.5 million)
Index return after all fees = 10%(around historical return)
Relative strength return after all fees = 15%(I know this is a prediction)
That is around a $4,000 difference.
Am not saying putting all your assets this way. Understand AA, and diversification.
Rob

Now you are just blowing smoke. If you have a system and it's not chance, it works. If not , you just want to play in the casino.

 

[robls]

Now you are just blowing smoke. If you have a system and it's not chance, it works. If not , you just want to play in the casino.

Exactly. With 5% of my assets.

 

[unclemick]

Hormones. Resistance is futile.

In retirement - me? - balanced index on full auto.

However - a few good stocks to keep the hormones in balance - strictly for medicinal purposes don't you know.

heh heh heh - after all the Saints finally did win a Superbowl. And if one really really 'must' be active - pssst Wellesley! .

 

[robls]

Hormones. Resistance is futile.

In retirement - me? - balanced index on full auto.

However - a few good stocks to keep the hormones in balance - strictly for medicinal purposes don't you know.

heh heh heh - after all the Saints finally did win a Superbowl. And if one really really 'must' be active - pssst Wellesley! .

Thanks, Unclemick.

 

[Emeritus]

Hormones. Resistance is futile.

In retirement - me? - balanced index on full auto.

However - a few good stocks to keep the hormones in balance - strictly for medicinal purposes don't you know.

heh heh heh - after all the Saints finally did win a Superbowl. And if one really really 'must' be active - pssst Wellesley! .

When I want activity and excitement I go diving or take a stroll with a Rhino

 

[Texas Proud]

In answer to your question, I discovered this board from a trackback link at Wordpress for our blog. I didn't know it existed before. Wordpress shows you the links for anyone who posts your article links.

Interesting... so you track you blog... and then jump in to "sell" what you have to offer without even figuring out why it was posted... and if the board is even interested in what you are selling

And don't try to say you are not selling... the only reason I can see to come and post right away is to get people to your blog... and even if we do not buy anything... you get ad dollars... so it is a win for you either way...

If you look at the history of the DOW industrials.... there is no way to be a 'buy and hold'... some companies have gone out of business... so have been bought or merged with others... so it is kind of hard to have an index of 30 stocks when one gets bought and you do not replace it...

BUT... that is a LOT different than... let's throw BP out of our index because we do not like them now... they don't represent what we want right now... no, I would be that the index that contains BP still has them in there... so my thinking of indexes are that they are not the flavor of the month (or week in some cases).... I don't have to worry about excess trading... of the fund manager deciding that the peso is undervalued and can make a killing investing there (from experience with Fidelity Asset Allocation.. which you would have 'thunk' would have been more conservative)....

Also, my mom has made a lot of money on buy and hold with Exxon and Texaco.. she even kept Texeco through the Pennzoil lawsuit... could she have done better... of course... did she do bad... nope..

 

[ESRwannabe]

P.S. Indexing and relative strength management are not mutually exclusive, by the way. PDP, PIZ, and PIE are all index funds in an ETF format that use relative strength. They own 100 high relative strength stocks and are reconstituted and re-weighted each quarter. (Disclosure: my company provides the indexes for these products.) AQR Management also has several open-end index mutual funds like AMOMX. Clifford Asness at AQR wrote his thesis at the University of Chicago on momentum; his thesis advisor was Eugene Fama, the famous efficient markets theorist. When I wrote that none of my three propositions was controversial, I guess I should have said "within the community of finance professionals and academics." Clearly, the news hasn't gotten to everyone yet!

Based on the performance I see no benefit to owning one of these ETFs.

http://quicktake.morningstar.com/etfnet/totalreturns.aspx?symbol=PDP&country=USA

http://quicktake.morningstar.com/etfnet/totalreturns.aspx?symbol=PIZ&country=USA

http://quicktake.morningstar.com/etfnet/totalreturns.aspx?symbol=PIE&country=USA

 

[haha]

This board should be renamed Boomerang. No matter where it is thrown, it always comes back to good old what we knew all along.

God's in Heaven, waiting for Mr. Bogle to take his reserved seat at the dais, and all is well in His kingdom.

Ha

 

[mmoody95]

Factual correction

And don't try to say you are not selling... the only reason I can see to come and post right away is to get people to your blog... and even if we do not buy anything... you get ad dollars... so it is a win for you either way.....

Factual correction: Wordpress blogs do not take ads. We get no ad dollars whatsover. Your assumptions about my motivation are completely incorrect.

In truth, I did this out of the goodness of my heart. I used to teach, and I still do a lot of coaching. I enjoy it. Like anyone, you can choose to believe what you wish.

Lots of words have been put in my mouth--things I never expressed in any of my posts. I like Jack Bogle as much as the next guy. We own some Vanguard ETFs for clients. I have nothing against index funds--we run some ourselves. Index investing clearly works--but part of the reason it works is some level of active management and/or weighting. I've not contended that our stock selection method using relative strength is the only thing that works over time. Numerous value factors have also been shown to work. Because we use relative strength doesn't make me against value. Etc., etc., etc.

Again, the three points I made are not really controversial. No one has examined the actual research and said "wait a minute, the math is wrong." It's not. When Mr. Bernstein and Dimensional Fund Advisors (a super low cost index firm, by the way) looked at the results, they came to the same conclusion as Blackstar.

When I coach baseball, I show kids how to catch popups with two hands. The second hand is used to close the glove. Some kids get it and start using two hands, and they stop dropping fly balls. Some kids don't ever get it. I conclude that they enjoy dropping fly balls.

Perhaps there are some members of this community who are willing to keep an open mind and to truly examine the research. Perhaps not. There may just be some members who enjoy dropping fly balls. There really is nothing I can do about that.

But I do thank you all for providing me with some insight into this niche of investors. It's clear that most feel that they have not been well treated by the professional investment community, and as a result are jaded, cynical, and angry. I am sure part of that is due to poor business practices at brokerages and investment companies, which is unfortunate. After the reception my posts have received here, I suspect some of it may also be due to a failure to communicate. Firms need to be forthright about what investors can expect--no sugar-coating, and investors need to learn to hear everything neutrally, not just the happy parts they want to hear. There is clearly a lot of mis-information around, along with all of the valuable info. It's perhaps more difficult than it should be to separate the wheat from the chaff. I sympathize with the challenge of the retail investor--who is not an investment professional by day--trying to make his or her way through the maze of truths, contradictions, and falsehoods.

May you all reach your goals and retire early!

 

[M Paquette]

Hmmm... I don't mine actively managed funds. I use them for bonds, for instance. Very lightly managed funds... I prefer index funds, but active ones are OK when run by managers who own their own firms, follow distinctive philosophies, and invest for the long term. (Yes, I'm a Boglehead). I don't like 'closet index funds', managed funds so large they act like an index, only with high fees. I don't like hedge funds. They are expensive, failure-prone, and often underperform, especially in after-tax accounts.

I'm mathematically literate. The cold equations don't buy me dinners, but they also don't lie, flatter, or charge a load fee. I'm a big fan of what John Bogle calls the "The Relentless Rules of Humble Arithmetic", or the Cost Matters Hypothesis.

"The Relentless Rules of Humble Arithmetic"

From the SSRN abstract:

The message of this article is simple, obvious, and almost invariably ignored by the investment community: Gross return in the financial markets minus the costs of financial intermediation equals the net return actually delivered to investors. This equation helps explain the failure of the mutual fund industry to deliver to shareholders their fair share of market returns, and it explains the enormous shortfall in the assets of the private and public retirement systems relative to their pension liabilities. It is high time for investment professionals to consider not only the comparative advantage of outmanaging their peers but also the community advantage that would result from a major reduction in the costs of our investment system.

 

[REWahoo]

May you all reach your goals and retire early!

Thanks, been there and done that - without the assistance of "the professional investment community".

 

[DJRR]

Again, the three points I made are not really controversial. No one has examined the actual research and said "wait a minute, the math is wrong." It's not. When Mr. Bernstein and Dimensional Fund Advisors (a super low cost index firm, by the way) looked at the results, they came to the same conclusion as Blackstar.

You still don't get it. Each of your three points are false or used to draw a false conclusion. You would think a teacher could understand basic logic.

Your basic premise is since only 25% of stocks make money, only own the 25% - brilliant. And Ken French can pick em for you for a SMALL fee .

I am sure you have heard of compound interest. If anyone could pick the top 25% of stocks he would own the country in a few decades. Investors Business Daily is the largest relative strength publication in the industry. They had a good run in the 90's but failed miserably in the 00's.

If you really looked at peer reviewed research in the industry you would see that the gains from relative strength do not typically offset the fees and taxes incurred achieving the gains on a risk adjusted basis.

That is why people are cynical. They either lost a lot of money trading stocks (I learned the $20k way) or they have had enough of paying 2% in fees plus 2% more in trading churn and extra taxes to generate a lower return on average than doing nothing but picking an index. My 401k S&P fund has a management fee of .08%.

Some people will invest a % as a hobby because it is fun, but no way would I give my life savings and future to someone who thinks that they will be the lucky one. Now if you were a market maker, had inside information, or could front run your research then maybe we could have a private discussion about real market beating opportunities

BTW, I have also used active managers in areas where I think they have an advantage, such as international small cap, and currently use an advisor with my same philosophy because my wife wants the peace of mind of having someone to call if I am not there. So I am not opposed to using professionals, just honest ones who can provide what they promise.

 

[Emeritus]

. My 401k S&P fund has a management fee of .08%.

mine is at .07 WOW are you getting ripped off

https://personal.vanguard.com/us/funds/snapshot?FundId=0540&FundIntExt=INT#hist=tab:3

 

[ls99]

Need more beer and popcorn, Thread is getting good.

 

[M Paquette]

Need more beer and popcorn, Thread is getting good.

 

[Bestwifeever]

Is this comment really necessary? A troll? And I'm still in 100% cash? How would you know that? You have no idea what my asset allocation is. Correct?
Post a link to an article that "some" may find of interest, and you are instantly labeled a troll. Thanks.
By the way, I have been a member of this board since 2003. Here's the linky to my profile:
Early Retirement & Financial Independence Community - View Profile: robls
Rob

I interpreted that comment to be about the person named "Rob" who was the first poster to the "official blog" of Moody etc. in its comment section (who pointed out that it is misleading to use material out of context, especially without acknowledging that that official blog was using it to support a completely contrary conclusion), and NOT about you, being the first poster on this thread or about you beginning this thread. I don't think you're a troll

 

[Texas Proud]

Factual correction: Wordpress blogs do not take ads. We get no ad dollars whatsover. Your assumptions about my motivation are completely incorrect.

Are you saying that the blog in question is NOT where you came from?

Because if you are from there.... I got ads from Google (mods, delete the links if you wish... I don't know how)... so either you are lying (taking the money from ads), or someone is using your blog to advertise and you are not getting any of the money... which is it?

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Lots of words have been put in my mouth--things I never expressed in any of my posts. I like Jack Bogle as much as the next guy. We own some Vanguard ETFs for clients. I have nothing against index funds--we run some ourselves. Index investing clearly works--but part of the reason it works is some level of active management and/or weighting. I've not contended that our stock selection method using relative strength is the only thing that works over time. Numerous value factors have also been shown to work. Because we use relative strength doesn't make me against value. Etc., etc., etc.

As someone pointed out... even Bernstein does not suggest what you blog claims.

"Simple: Because a portfolio of "carefully chosen" equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target. "

And a paragraph down:

"Now, some investors and fund managers do wind up picking these winning lottery tickets in the stock market. But history shows that this ability doesn't persist over time.
Even if you're lucky enough to win with a concentrated portfolio of superstocks, after a while you'll find that most of your net worth is tied up in a handful of holdings - and that's a sure-fire prescription for chronic insomnia. "

and HIS conclusion

"Don't give up on indexing. The only way you can be assured of owning all of tomorrow's superstocks (and super asset classes as well) is to own the entire market. So even though it's been a tough decade for the world's benchmarks, you're still better off owning a mix of total market index funds that cover U.S. and foreign stocks. "

Again, the three points I made are not really controversial. No one has examined the actual research and said "wait a minute, the math is wrong." It's not. When Mr. Bernstein and Dimensional Fund Advisors (a super low cost index firm, by the way) looked at the results, they came to the same conclusion as Blackstar.

Here is number 1

1. buy-and-hold typically loses money, according to both Bernstein/DFA and Blackstar Funds. No controversy there.

I see nothing in any of the articles where is shows that buy and hold typically loses money.. please show me the math behind that? So, yes, this is a controversial statement. (and you seem to think you made none)

It is made to create fear in an investor that he can not (or should not) do a buy and hold strategy... but there are very few 'real' buy and hold... you make it sound like if you buy something you can NEVER sell... that is not what I was taught was the strategy... but that you should not be trading all the time... your time horizon is long term. If you look at the internet you get Warren Buffet as the biggest buy and hold guy... are you going to tell me HE lost money? His return is a lot better than any fund manager out there... over the long term...




Also... one of the fund families that use the method you talk about on the blog is Value Line... they rank the companies from good to bad... and they have mutual funds that choose the high ranked stocks... I just took a look and their fund that tracks the best stocks have less than $100 mill and is rated a 1 star... not that great... I don't know your guy... but why not put down how great he has done so we can compare...


And you last statement is basically that momentum investing is the way to go... but there are some big pitfalls in that way of investing...

Riding The Momentum Investing Wave


As for me, I don't want to spend so much time trying to make sure that the flavor of the day/hour/minute is in my portfolio or should be out... to much work.. and again, show me a mutual fund that invests this way that is successful OVER TIME...


Index investing (as I mentioned before) has proven to be better than 95% of active fund managers... I think that I am just fine making more money than 95% of the people... I am not greedy.... (I can not find the article with the 95... but can find 80% easily... so sub that number if you wish.. again, I am not greedy)...

 

[Nords]

It's a shame because understanding capital markets, investor sentiment, and saving like mad can help all of you reach your early retirement goals or help you live better in retirement. But good luck to you all.

I think it's a shame that you feel your [-]lectures[/-] contributions will cause thousands of posters to ignore the collective lessons of hundreds of thousands of posts. If you can't stand for a little "peer review" by people who have been there, done that, and ER'd without your help... then we're not ready for your "help" either.

I think the posters who become valuable contributors to the board are the ones who ask questions, read the most popular threads (or at least the FAQs & archives), and acknowledge that there's more than one way to do this.

Is this comment really necessary? A troll? And I'm still in 100% cash? How would you know that? You have no idea what my asset allocation is. Correct?
Post a link to an article that "some" may find of interest, and you are instantly labeled a troll. Thanks.
By the way, I have been a member of this board since 2003. Here's the linky to my profile:

I interpreted that comment to be about the person named "Rob" who was the first poster to the "official blog" of Moody etc. in its comment section (who pointed out that it is misleading to use material out of context, especially without acknowledging that that official blog was using it to support a completely contrary conclusion), and NOT about you, being the first poster on this thread or about you beginning this thread. I don't think you're a troll

Oh, chill, Robls, it's not about you. If you've been paying attention since 2003 then you'd recognize the syndrome:
Can retiring early make you crazy? Getting to know "Passion Saving" author Rob Bennett

 

[Gone4Good]

Wrong and wrong.

"Turnover of the portfolio is defined as the market value of securities sold out of the portfolio as a percentage of the portfolio's total market value. The turnover rates for the indexed TSE 300 and the S&P 500 funds are 8.2% and 8.3%, respectively." [This is from a Canadian study.]

It would be nice if you posted a link to the study so we could judge its quality. Or, you could just link to the S&P site where their data shows average turnover for the S&P 500 on a capitalization weighted basis of 4.6% from 1992 to 2009. (psst, a 78% overstatement of turnover is a pretty big miss, IMO)

The fact is that you don't know what you are talking about. You drank the kool-aid and now you're just repeating what you've heard or seen written by some financial commentator. But you've never actually checked the facts. Most of this stuff is simple to confirm on any search engine. Or go to S&P's own website. As the saying goes, "you're entitled to your own opinion, but you're not entitled to your own facts."

Back at ya!

 

[Emeritus]

Index investing (as I mentioned before) has proven to be better than 95% of active fund managers... I think that I am just fine making more money than 95% of the people... I am not greedy.... (I can not find the article with the 95... but can find 80% easily... so sub that number if you wish.. again, I am not greedy)...

I believe that the research shows that when you include fees and taxes related to churning indexing outperforms managers 80 or 95% OF THE TIME. which is actually a very different statement. and even more devastating to investment advisers, since they can't point to anyone who has a "system" used over a long enough period of time (and with enough money) to avoid chance can beat the market.
pretty good pieces at
Strategies - A New Study Shows the Market Is Tough to Beat - NYTimes.com
http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html

 

[Texas Proud]

I believe that the research shows that when you include fees and taxes related to churning indexing outperforms managers 80 or 95% OF THE TIME. which is actually a very different statement. and even more devastating to investment advisers, since they can't point to anyone who has a "system" used over a long enough period of time (and with enough money) to avoid chance can beat the market.
pretty good pieces at
Strategies - A New Study Shows the Market Is Tough to Beat - NYTimes.com
http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html

I guess that my statement was a bit off... as I do not know how many people invest in which fund... so I stand corrected...

I do like this statement

"Professor Wermers said he believed that it was “exceedingly probable that any fund that has beaten the market by an average of more than one percentage point per year over the last decade achieved that return almost entirely due to luck alone.”"

More proof that statement one was not correct...



BTW, did he leave already It was a bit fun... hope you popcorn eaters had some also

 

[REWahoo]

BTW, did he leave already

I think I heard him mumble something about casting pearls before swine as he went out the door...

 

[Westernskies]

I think I heard him mumble something about casting pearls before swine as he went out the door...

...departing the lumpen slums of cyberspace?