Most money managers use the S&P500 as the benchmark, and for a good reason. If a dollar bill is like a vote, these 500 companies have gathered the most votes from investors. Trying to beat the index is like to beat the majority. That was the argument of the market efficiency theorists.
Now, do you believe in
Wisdom of the Crowd or
Folly of the Crowd? I think both are true, but in different time frames. In the long run, the truth will out. But see how long it took for Communism to die.
Agreed. The S&P500, being defined on market capitalization, is biased towards large corporations, which are less likely to be growth stocks. Some of them, like GM, are shrinkage stocks.
Yes, the next Microsoft, Cisco, Walmart have to come from small-cap stocks.
But sadly, for one of the above, there are 100s more that are snuffed out like a striked match held out in the wind. I do not have statistics, but suspect that the percentage of "shrinkage" stocks is higher in the small-cap and micro-cap worlds than the large caps. But as an aggregate, they do provide higher rewards for higher risks, read higher volatilities, as we all know.
Take the extreme case of microcaps. One of my friends likes to scour the penny-stock world, looking for bargains. I tried to tell him that these stocks trade for pennies for a reason. I'd rather look for bargains in the larger established companies that are out of favor, temporarily as I hope.
As many here, I would be more interested in hearing about successful investors with a broader AA than those who got rich based on just one or two stocks. The latter cannot be emulated. How do I turn the clock back to put it all on Intel or Walmart in the 80s?
But in general I do think rebalancing is a huge factor. The 08-09 market proved its wisdom as far as I'm concerned, it actually forced me to buy low.
So I'm not surprised that people who rebalance formulaically beat the market. The losers would have been those poor folks who got scared last winter and sold to 'stop the losses'.
Yes, that is the biggest factor that dwarves everything else. Even so, people execute their [-]trade[/-] rebalance in so many different ways. A bit of differences in AA, in timing, sector allocation can yield a return difference of a few percent easily. Those few percents, we can live on for a year! We can all claim to do the same thing, but [-]luck[/-] chance has a factor there.
Yes, that's true too. You can own plenty of the stocks in the S&P500, but if you have a different weighting/allocation of them and/or you buy some and sell others you will have a different performance during any given year.
Lots of mutual funds behave differently than the S&P500.
Yes. And market efficiency theorists say that no one will consistently outperform S&P500 over the long run. Hence, Bogle invented the S&P500 index fund. In an interview a couple of years ago, when asked about various sector funds that Vanguard provided, Bogle said that it was done to appease its investors, but he himself did not believe in them.
I don't know what believing in market efficiency theory or not has to do with anything. Different asset classes go through different cycles and you can't predict which asset class will outperform in any given year which is why people who use AA usually rebalance versus using some market timing method.
About different asset classes performing differently, yes that is always true. And as Bernstein points out in his
Intelligent Asset Allocator, some asset classes have underperformed for two decades straight in the past. How many of us have the patience to wait that long? I may not be alive in 20 years.
"In theory, there is no difference between theory and practice. But, in practice, there is."- Yogi Berra
BTW, the S&P bottomed (closed) on March 9 2009 at 677.
Thanks for correcting my error. I was just throwing out a strawman investor to see how we fare against an absolute buy-and-hold investor.
The question was have you recovered. Nothing was asked about the depth of one's plunge and the level of risk one took...
Just answering the OP's question would not let us have this more interesting talk. It's not just the destination, but the journey too. No?
Your journey is an interesting one. I had mine with tech stocks in 2000, and yes, never again.
On the topic of S&P500: A Fama & French / Merriman / DFA style slice & dice portfolio would have only 25% of equities in US large cap funds such as those in the S&P 500. 75% of the equities in such a portfolio would not be in the S&P500.
Instead the equity portion of the portfolio would be filled out with 25% US small cap, 25% large cap foreign and 25% small cap foreign.
While I do not think everyone on this forum is a slice-and-dicer, I think many more people tilt towards that way than they do towards total-market-index+little-foreign.
Yes, I suspected the same, although so many claim to be Bogleheads. I have come to the conclusion that similarities between them is like that between the Greek Orthodox and the Mormon; they are both Christian.
By the way, though I am not a believer in the market efficiency theory, I read all their arguments. They do have some compelling data to back it up. Sure, you can beat the market as I have done in some recent years, but they say it is all luck. Of course, I should pay attention. The market god hates arrogance.
He has to be wearing a XXL.
His would be so large, I do not see how he can walk.
