Use access key #2 to skip to page content.

d3wilbur (< 20)

Indexing to win.

Recs

4

June 09, 2008 – Comments (4) | RELATED TICKERS: VV , QQQQ , VO

Indexing is a bit of a heresy here.  The god of the Fool is stock picking.  I was chanting the mantra myself for a while, but then I gave my portfolio a good look.

While it's true I was beating the SPY, my stock selection was mostly Tech and Small Cap.  I was taking a lot more risk than SPY.  When I compared my results to the Nasdaq QQQs I was getting creamed.  If I put my money into Qubes instead of the dozen or so stocks I actually bought (which thankfully included Apple AAPL and Diamond Hill DHIL) , I'd have made nearly 3 times as much money as I did.

The Nasdaq is a risky game.  In the long run, I don't think they can outperform SPY.  And I'm convinced timing is a fool's game.  So how can I cut a huge chunk of risk out of my portfolio (like the $2000 I've lost on Pfizer PFE so far)?

Indexing.  Vanguard can give me very cheap (as in low fees) access to a variety of interesting indexes.  VV is Vanguard's equivalent to SPY and they do it for a smaller fee.

The data on actively managed indexed funds shows that the experts can't beat the market, so what makes me think I'm smarter (or luckier) than them?  With an index fund, I just track the index, year in and year out and rack up the gains.  It's not fast, but it's reliable.  You can do fast at the roulette table:  "300,000 on Black please".  If you win it's awesome.  If you lose, you're hosed. 

So I'm moving my real portfolio to index ETFs.   My American money will be in Vanguard's mid-cap ETF VO.  I'll talk more about that next time.

And what on earth is up with my CAPS picks?  That will have to wait for another day. 

4 Comments – Post Your Own

#1) On June 09, 2008 at 10:58 PM, anchak (99.76) wrote:

Wilbur.... you bring up a good point and I was skeptical initially with CAPS since the technical guy inside me kept on repeating to me that most 5 star stocks that you find in CAPS actually come from the Small/Mid Cap Stable. This is not difficult to comprehend - the way the Gardner brothers philosophy and the Fool works - its definitely has a small cap bias. And MF is setup in such a way that it makes you pick from the flock - that's the value , MF gets Community Intelligence for free for use. You'll see many such good points on MF picks and their return etc...this is a good place to start - TMFBreakerDave's blog:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=24454&t=01000000000000052298

However, you miss a few things, I personally lament the fact that I was not an active fool for a long time ( I picked a portfolio only in Nov-Dec 2007)

(1) The biggest thing is Community Intelligence and learning and exchange of ideas:: The talent pool here is mindboggling.
And you'll surprised how many people you would find who are subscribers to the Indexing theory ( even the Gardner brothers are) - since you dont have any favorites yet - I suggest one of the top fools: Everydayinvestor - He's a fearless individual in the Shorts world - yet he anchors his portfolio with Vanguard index funds ( his choice is all Value). You'll find a ton of info on his blog and other links.

(2) That's the other thing - Indexes are all Long only. As I said, my great regret is not being active here thru summer 2007.One could have side-stepped a lot of heartburn by simply doing some intelligent asset allocation.

I know about the research of how missing the top 30 days would actually cut your return by almost 30-40%. But did you also know that missing the bottom days - actually boost your return by 25-30% also.

Market timing is tough - I believe in Dollar Cost Averaging - however it is simply imprudent to ignore broader macro and environmental reality.

(3) All boils down to your risk appetite and asset allocation. Majority of your portfolio should be in indexes. If you are trying to test out CAPS in real life ( I have - fairly profitably) - then you should know what the allocation and volatility limit should be. And then only experiment with a few ideas. Net - you become a much better investor. As the Gardner brothers say - if you dont want to bother - them VFINX is for you. I say VTMSX (60%) and VFWIX (40%) for you - and yes not the ETF, the funds - dollar cost - nobody mentions this - by buying an ETF ( unless you are doing Zecco) - you either incur commissions or take uneccessary timing and/or exposure risk due to high dollar investment - which is what you wanted to minimize in the first place. Do not lull yourself in thinking it doesn't matter - if you bought QQQQ near the semi-top ( false bottom) days - you would still be negative after 10 years.

Indexing is great - except it is predicated on the fact that Economies expand - or has always expanded - so you get the underlying growth - I think that is a diminishing returns concept going forward.

 

 

Report this comment
#2) On June 09, 2008 at 11:10 PM, russiangambit (99.18) wrote:

Two problems I see: SP500 contains only US companies and it is only long. So, if you use indexing, it makes sense to have some internatioal ETFs and short ETFs for hedging during bear market like now. In bull market indexing works OK> 

Report this comment
#3) On June 10, 2008 at 12:24 AM, eskatonic (99.53) wrote:

you could also look into US and Canadian Oil and Nat Gas Trusts/Companies/Funds that pay 10-14% dividends.  nice and consistent dividends even when oil is stable (or declining, but then the share prices decline so its still not a good place to be).  right now they've been going up with oil so, depending on your view on oil, it might not be the best time to jump in.  two of my favs are BPT and PGH.  they aren't flashy but they bring in the money.

there are also some tax issues depending on how the entities are structured and what type of account you will be holding them in, so make sure you do your homework.

 and to throw in a comment to something anchak said, all indexes may be long, but there are etfs that go short on an index.  there are also some double short or double long etfs.  I don't know of any "short" mutual funds, but I don't do a lot of mutual fund research since I swore off mutual funds after the last round of fund manager scandals a few years back.

Report this comment
#4) On June 10, 2008 at 12:48 PM, d3wilbur (< 20) wrote:

Thank you for your excellent comments. 

To russiangambit: you're absolutely right that I need to include non-US investments.  I'll talk about that in my next post.  But I'm not so big on going short.  A real short is a risky venture, your upside is capped, but the downside unlimited.  Short funds are a different story, but so far I'm not impressed with their results.  In addition, I strongly believe that long on stocks will outperform for the long haul.  (2 out of every 3 years I think is the average).

To eskatonic: I think there has been a major change in Canadian tax law which will probably end up killing the big dividends on the Oil/Nat Gas Trusts.  But while I think the medium term looks good for Energy/Commodities, the stock market is a safer bet in the long term.

To anchak: I really believe that market timing is a myth.  Tom and Dave clearly missed the top on this last turn around (actually I don't think they try to time at all, to their credit in my view).  And if they can't guess when it's best to pull out/move back in, how can I expect to do it?  It was clear for nearly a year that there was a problem with Subprime mortgages, but only in January did the market fall apart.  Anyone who was short all of last year probably did very poorly.

I'm dubious of any prediction that the markets of the next hundred years will be much different than those of the last one hundred.  I've heard both bulls and bears say: "But now everything is different" and a few months later we find that it really isn't. 

Report this comment

Featured Broker Partners