How To Be An Index Investor

[Midpack]

A theme I have pushed here often, written by someone far more eloquent. Figuring out AA and picking funds ("strategy") is the easy part by far. Where all investors (not just index investors) often go off the rails when their emotions get the best of them ("discipline"). And discipline usually doesn't come without a solid "philosophy." How To Be An Index Investor

I hear it all the time. “How hard can it be to buy a few index funds that track the markets? Anyone can do it. It’s a no brainer.” If only this was true.

Investing in index products alone won’t make you a successful index investor. The problem isn’t the products – it’s your brain. In fact, the opening quote in the article is true. You would be a successful index fund investor if you had no brain to tempt you to do otherwise. For the rest of us, it can take every ounce of brain energy we have to resist that temptation.

 

[gcgang]

Peter Lynch, former manager of Fidelity Magellan, in his book One Up on Wall Street, said that while his fund had made 20% per year in the 1980 decade, the average investor only made about 4%. Similarly, I've seen Lipper studies updated for more recent time periods that show similar underperformance by individual investors. Time weighted vs dollar weighted returns.

The reason? People buy after the up years, sell after the down ones. I think that is what you are talking about.

As investors, you have to fight your impulses to avoid danger (sell when things "look bad"), and seek rewards (buy after up). Easy to say, but very hard for most people.

Of course, nobody on this board ever makes this mistake.

 

[dontworry]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

 

[sengsational]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

Just be satisfied taking the portion of equities that rose above your target into safety? I find that gamifying asset allocation distracts me from the real dollar values that come and go.

 

[gcgang]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

Your situation is NOT the one where investors harm themselves. As the previous poster said, if you've had appreciation in equities, now would be a great time to rebalance (selling high!).

In addition, perhaps you should revisit what your AA "should be". Maybe you don't need to be as aggressive in order to meet your goals now that your portfolio has grown substantially over the last few years. A lower equity allocation might get you to your goals without the added risk. Again, you'd be selling high.

Congrats!

 

[FLD3C]

Nothing is "safe". There are only investments with different types and degrees of risk. The goal of asset allocation is to diversify the risks so you can sleep well at night.
A written IPS and asset allocation can help with following the plan in both good times and bad

 

[CaliforniaMan]

Your situation is NOT the one where investors harm themselves. As the previous poster said, if you've had appreciation in equities, now would be a great time to rebalance (selling high!).

In addition, perhaps you should revisit what your AA "should be". Maybe you don't need to be as aggressive in order to meet your goals now that your portfolio has grown substantially over the last few years. A lower equity allocation might get you to your goals without the added risk. Again, you'd be selling high.

Congrats!

Neither you nor I know if he would be selling high. He might be, but then again he might put it into bonds, watch them fall, and have to buy into equities later at a higher price. Nobody knows if this market is high or not. The market is what it is, you wont know if it "was" high or low until sometime in the future. IMO just forget the what the market level is doing and keep to your same allocation. You cant out think it and neither can anyone else.

For me in my young years I kept my allocation at 100% equities (first looking for the 'best' mutual funds, then when I got a little less stupid, index funds), then as I got older started adding in bond funds until I got to my desired allocation. I am not suggesting that you do that, just decide how, based on past history, you want to allocate and then do it.

Forget trying to decide if the market is high or low. You cant do it and I think history and a ton of university studies bear this out.

 

[braumeister]

Nobody knows if this market is high or not. The market is what it is, you won't know if it "was" high or low until sometime in the future. IMO just forget the what the market level is doing and keep to your same allocation. You can't out think it and neither can anyone else.

Probably the best single piece of investing advice I've seen in a while.
I'm constantly amazed at how simple it is, yet how complex it looks to those without experience (especially including my younger self).

 

[walkinwood]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

I fight this temptation all the time!

But, if you run the numbers, you'll see that moving small amounts from equities to safe investments doesn't really save you much in case of a market downturn. eg. A 60/40 portfolio will lose 15% in a 25% market decline (assuming the 40% stays put). A 50/50 portfolio will lose 12.5%. Similar numbers on the upside.

2.5% is nothing to sneeze at, but then, its not something to keep you up either.

I try to remind myself of this fact every time I'm tempted to play with my AA.

 

[Animorph]

Think of an index as not just a collection of investments. It is also a time series of returns. You are trying to capture those investments, but even more you want to capture those returns. Buying and selling just distorts your market average gains.

 

[ripper1]

Probably the best single piece of investing advice I've seen in a while.
I'm constantly amazed at how simple it is, yet how complex it looks to those without experience (especially including my younger self).

Best piece of advice a young Jack Bogle got once was.....Nobody Knows Nothing

 

[donheff]

The author of the OP's cited blog post plans to preview his book for free as a series of blog posts.

 

[Midpack]

Reading this thread maybe the relative degrees of difficulty are:
1) Strategy (the easiest by far, yet the most often discussed)
2) Discipline (harder, not letting emotions to lead the investor beyond rebalancing into market timing)
3) Philosophy (hardest, understanding how markets and brokers behave, essential to enable discipline)

I'd always sort of lumped the last two as one. They aren't the same, though I agree you can't have one without the other.

There are too many books about 1 alone, fewer good ones that do justice to all three. The Four Pillars of Investing was the most convincing on all three that I ever read. YMMV

 

[easysurfer]

On the "if you had no brain" part to temp you away, that's why DCA goes along well with indexing, to keep the brain and emotion out of the equation. To keep on investing thru good times and bad.

 

[John Galt III]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

I'm doing rebalancing with a twist. I'm locking in gains by lopping off the profits on my index fund as it rises, and moving the profits into a stable value fund. The twist is that I have decided to discipline myself to get totally out of the index fund (as opposed to buying more of it) when and if it drops to a predetermined price per share. When I get out, I'll either move it to stable value or into some other index fund that "appears to be" trending upward. And yes, I realize that I cannot predict my new index fund will continue to trend upwards or for how long. So I suppose I'm gambling just a bit.

 

[Options]

...

The Four Pillars of Investing was the most convincing on all three that I ever read. YMMV

Yes, FPOI is outstanding. Devil Take the Hindmost by Edward Chancellor was another fantastic read (details market manias throughout history, and is fasinating in showing how it's never, ever, ever different; my takeaway, anyway). Interestingly, lately I've been rather obsessed (some might say) with reading all of Bogle's speeches posted on his blog. All of this has convinced me to use a basic total market index approach, tune out all news (this includes political, i.e., the latest short-term fascination with the Ukraine), rebalance annually, and above all, stay the course.

As I've posted elsewhere, I've also recently decided to create portfolio withdrawal plan to proactively deal with the next downturn ahead of time.

 

[unclemick]

'Resistance is futile.' More so if you are male and reasonably healthy.

Football in season and a few good stocks - 5% of total portfolio or less has been proposed (Bogle ?).

1966 - 2006 I of course violated this guideline while maxing out my 'underwatched' 401k in S&P 500 index. Net result - retirement portfolio 90% index and and 10% all other 'brilliant' investments over 40 yrs.

Hindsight can be a wonderful thing - mainly because I survived my own great ideas.

heh heh heh - 2006 went Target Retirement in retirement portfolio. And yes I surrendered - watch the pro's (go Saint's)in season and have a few (3-4) good stocks, 3% of total.

Male and not dead yet - whatta gonna do!

 

[gerntz]

What I have been fighting myself about lately is "safety for the gains". It's so tempting to take out some of the nice gains we've had and put them in something "more safe". But then our AA wouldn't be where it should be. How to fight this temptation? I don't know!!! Ack!

I'm confused. You've had gains but if you cash out some gains your AA won't be where you want it. That means it wasn't where you wanted - too little equities - before the gains, correct? If so, then no reason to change now.

 

[bamsphd]

Personally, I've concluded that I can not pick a particular equity/fixed-income ratio that I will be satisfied with for the rest of my life. However, I can pick a ratio for now. To avoid convincing myself to buy-high/sell-low I also impose a rule on myself regarding when I can change my current equity/fixed-income ratio.

I may only increase my equity allocation when the stock market has hit a new one or more year low in the past few weeks, and I may only decrease my equity allocation when the stock market has hit a new one or more year high in the past few weeks.

With that simple rule I'm almost always going to adjust too early, but I will never adjust the wrong way near a market bottom.

P.S.
I last decreased my equity exposure at the very end of 2013.