Why most of us should diversify-- Warren Buffett

[chinaco]

Quote:

Originally Posted by haha That is what he meant, he spells it right out. Don't buy at the wrong place or the wrong time. Buy a cheap index fund and slowly DCA into. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb. I cannot understand the negative take on diversification-over- time from some posters here. Why would diversification over asset classes and securities be important, but not diversification over time? ..... Ha

I DCA when i move money most times even when I could lump sum invest. I do not trust my ability to read the economy. My experience has been that I get it wrong more than right when it comes to trying to time it.

While the quote from Buffet did not state it, I suspect he is getting at the negative affect of dumping money into hot investments (sectors or companies). By the time the average investor recognizes the investment is hot, it often has already peaked or most of the run is over. DCA mitigates the risk.

[haha]

I admit that to me "academic finance" is an oxymoron. I think it is very useful if you are designing or selling some sort of leveraged derivative to others, or buying the same strictly with OPM.

I think academic finance is also useful to FPs and other financial salespeople, in that a simplified version of it is easily explained, has authority behind it, and might stand up well in court should the need arise.

But for equity and bond investing of one's own money, I'll take one practitioner with a long history of success over all the academics that might be found at U. of Chicago, MIT, and Stanford together.

Seth Klarman, one such practitioner with a long history of success quoted Wilbur Wright on the process of learning how to fly:

“There are two ways of learning how to ride a fractious horse; one is to get on him and learn by actual practice how each motion and trick may be best met; the other is to sit on a fence and watch the beast a while, and then retire to the house and at leisure figure out the best way of overcoming his jumps and kicks. The latter system is the safest; but the former, on the whole, turns out the larger proportion of good riders. It is very much the same in learning to ride a flying machine; if you are looking for perfect safety, you will do well to sit on a fence and watch the birds, but if you really wish to learn, you must mount a machine and become acquainted with its tricks by actual trial.”

So it is with investing.

Klarman goes on:

For 25 years, my firm has strived to not lose money—successfully for 24 of those 25 years—and, by investing cautiously and not losing, ample returns have been generated.

And

After 25 years in business trying to do the right thing for our clients every day, after 25 years of never using leverage and sometimes holding significant cash, we still are forced to explain ourselves because what we do—which sounds so incredibly simple—is seen as so very odd. When so many other lose their heads, speculating rather than investing, riding the market’s momentum regardless of valuation, embracing unconscionable amounts of leverage, betting that what hasn’t happened before won’t ever happen, and trusting computer models that greatly oversimplify the real world, there is constant and enormous pressure to capitulate.Clients, of course, want it both ways, too, in this what-have-you-done-for-me-lately world. They want to make lots of money when everyone else is, and to not lose money when the market goes down. Who is going to tell them that these desires are essentially in conflict, and that those who promise them the former are almost certainly not those who can deliver the latter?

Those who might be interested can read the whole piece at

http://www.retirerichblog.com/2008/02/investing-guru-seth-klarmans-talk-at.html

Ha

[Gotadimple]

Quote:

Originally Posted by megacorp-firee I can't remember where on this board it was stated, but it was a quote that went along the lines of, missing the top x number of up market days and you will miss out on the majority of the upswings that will make your portfolio grow. I have also seen statistics on yty growth of mutual funds versus investors actual growth rates. The latter is less than the former due to investors buying and selling at the wrong times. So my leaning is to get fully invested (lump sum) if I am moving money around in my portfolio. Of course I DCA'ed when I was w*rking with monthly contributions to my 401K and taxable accounts. but it was more of a 'forced DCA' since i was paid on a semi-monthly basis. If I received an inheritance, I would most probably lump sum invest it to keep my AA in line.

Malkiel cites a study done by Charles Ellis that shows that between 1982 and 2000, if an investor missed the best 30 days of the market the return on an investment in the S&P500 would be 11.2% rather than 18%. Meaning that you can't tell when the best days of the market will be so trying to time the bottom often doesn't get the desired result.
--Rita

[megacorp-firee]

Quote:

Originally Posted by Gotadimple Malkiel cites a study done by Charles Ellis that shows that between 1982 and 2000, if an investor missed the best 30 days of the market the return on an investment in the S&P500 would be 11.2% rather than 18%. Meaning that you can't tell when the best days of the market will be so trying to time the bottom often doesn't get the desired result. --Rita

That's the one.
It seems that the moral to the story lump sum investment then.
Because you want to be 'in' on the best days.

[DblDoc]

Quote:

Originally Posted by megacorp-firee That's the one. It seems that the moral to the story lump sum investment then. Because you want to be 'in' on the best days.

That and the general trend of the market is upwards.

DD

[haha]

Quote:

Originally Posted by Gotadimple Malkiel cites a study done by Charles Ellis that shows that between 1982 and 2000, if an investor missed the best 30 days of the market the return on an investment in the S&P500 would be 11.2% rather than 18%. Meaning that you can't tell when the best days of the market will be so trying to time the bottom often doesn't get the desired result. --Rita

Notice the dates of this "study". This could not have been more rigged to produce the desired results.

Ha

[al_bundy]

it's not very scientific since you dont' look at when the days occured. depending on when you buy and sell you can beat those numbers even if you miss every big up day. the secret as always is control your losses

[FinanceDude]

Quote:

Originally Posted by haha Notice the dates of this "study". This could not have been more rigged to produce the desired results. Ha

Most studies like this use the "longest bull market in recent history" to make their claims. Actually, imagine if it went 1982-1999....even "better"........

[bots2019]

Sure, the timeframe might be cherrypicked to show the greatest impact.

But if you took the best 30 days out of any 19 year period, the results should decrease dramatically (even if you used 64-82).

[al_bundy]

Quote:

Originally Posted by Gotadimple Malkiel cites a study done by Charles Ellis that shows that between 1982 and 2000, if an investor missed the best 30 days of the market the return on an investment in the S&P500 would be 11.2% rather than 18%. Meaning that you can't tell when the best days of the market will be so trying to time the bottom often doesn't get the desired result. --Rita

finally someone posted this for me
Bear Mountain Bull » Up the Down Staircase

most of the market's best days are in a bear market so if you miss them, it shouldn't hurt your returns that much, if at all

[unclemick]

Hmmm - like I had a choice - once a month - 401k, 500Index, plus the company contribution, 1977-1992 - aka the horse I rode in on.

Today - full auto aka Target Retirement for real money.

Now for fun money - since you get in trouble looking over people's shoulders when they play cards - I can Google up what Warren buys, pssst Wellesley top ten, and a few others and buy when I have some petty cash. No rebalancing, DCA, theory stuff.

The Norwegian widow takes her dividends and we dump em when we don't like the company anymore or more likely when they merge or go private.

Two last year -Keyspan and New Plan Realty.

heh heh heh - Usually if they stay in business I keep em - even turds who cut their div.'s like AETNA and Union Pacific.