Discussion in 'Economics' started by noob_trad3r, Jan 13, 2012.
Even very smart people confuse bull market with brains.
Whatever Bogle, Malkiel say only works in a cyclical bull period. How does index investing helped to Nikkei inventors since late 80s or our current market since 2000???
The article is right with regard to the unsavory aspects of Wall Street, and the importance of avoiding high costs etc., etc. But the investment advice is bad nevertheless. The problem with index funds is they include too much stuff you should not own.
I've covered this topic in more detail in other threads so I don't want to repeat everything. I'll just summarize the conclusion without going into why, but there is sound reasoning behind this. You should use a Roth IRA for this to the maximum extent you can.
Take an index approach but but cast a wider net. Select from among only stocks that meet these two criteria at a minimum: 1) pay dividends and have an established history of raising their dividends, and 2) are in a long term up trend. Do not buy anything that does not pay a dividend. Examples: PHG, PG, SQM, DEO, XOM, STO, etc.
Buy casting a wider net I mean include stocks that would not be together in the same index. You can include any stock that meets your selection criteria even if it is over the counter, such as Roche for example. Make sure you have wide international representation and haven't emphasized any one country. You only need a few shares to begin. Reinvest all dividends. Review your portfolio once or twice a year but only make changes when absolutely necessary because the company no longer satisfies your criteria.. If the market goes down and your stocks go down don't worry about it, but if the market goes up and your stock doesn't worry a little, if the market goes up and your stock goes down find out why and consider making a change.
Don't diversify too much to the point where you lose track, and make sure no holding represents more than 10% of your capital. Ultimately when you've built your portfolio you want between ten and twenty stocks. That's it. No more.
Never take a brokers advice on anything. If you need help in selecting candidates use an independent rating service such as Morningstar.
This type of portfolio will beat the market and index funds in total returns, while allowing you to sleep at night. You can get rich in about 30 years by steady investment into this kind of portfolio.
RE: Our Market 2000 to 2012
You are picking the top of the biggest bull market and comparing it to a recovery from the worst financial crisis in 80 years. And even then when accounting for dividends are up 6.5% assuming you reinvested. If you didn't reinvest you would have 3.4%.
Is it great? No. But the data that describes the failure of the market to investors is cherry picked.
Wrong, a diversified portfolio can grind out respectable money over the long-run even in an era of a down stock market, due to being invested in several classes of stock, doing rebalancing from bonds (taking profits at high prices) to stocks (investing at low prices), and reinvesting the income. For example, during the 'lost decade' of 2000-2009, investing 100% S&P lost money, but investing in a typical diversified balanced portfolio of 20% S&P, 10% Russell 2000, 20% MSCI World, 10% Emerging Markets, and 40% US Treasuries would have made quite respectable returns (better than being in cash or bonds). Throw in say 10% gold there and you would be even better, due to gold's negative correlation.
It would be fair to criticise index investing if a balanced portfolio had under performed cash and bonds over many extended periods, but this rarely happens. A diversified low-cost index portfolio is the best shot for 99% of people to achieve reasonable returns superior to cash and bonds, without taking the high risks of excessive stock market exposure, or stock-picking/active trading.
This approach increases costs and risks, and there is absolutely no evidence that it will outperform on a risk-adjusted basis. It is also tax-inefficient, you'll pay a lot more in taxes when one of your holdings goes into a downtrend or cuts their dividend and you have to sell one or more components. It will also take much more time and effort than passively owning 3 or 4 index funds.
I'm not an investor ... I'm a trader. But if I were to invest I would stick quite closely to the advice in piezoe's post. Read THE BATTLE FOR INVESTMENT SURVIVAL, then reread piezoe's post, mix in two cups of a patience and bake for 30 years at 350. That is a winning formula ... a big winning formula.
Read this thread:
Pick your stocks using a methodology such as this:
Go to cash on clear Bear Markets. You can use this thread to help you:
I have been doing exactly the above to manage my dads funds:
We have missed some upside, but have never been caught in a huge drawdown. This way, we catch some of the bull market, but stay away from bear markets.
Thank you Swan Noir. You and i are some of the older posters on Et. We have been through a lot and have the benefit of hindsight. Nitro's approach to long term investing is similar, and for the same reasons. I did not go to the threads he listed, but i know from reading his posts in the past that he has a similar philosophy of long term investing.
Yes, piezoe, I have observed Nitro's approach and he clearly knows where value lies. The most successful investor I ever knew -- a brilliant ability to sense what was coming into and going out of fashion in the market -- used a very different approach and one that was not tied directly to payout.
Yet on a rare occasion when we talked about the market as a whole and not individual issues he was quite focused and knowledgeable about a host of dividend increases that had been announced in the prior six months and I was surprised by how carefully he had inventoried every one in his mind. Not just the amount of increase but their historic dividend record, had they ever cut a dividend (going back to and including the depression) etc., etc. It is important to understand this guy was a genius who carried facts around like a beach stores sand.
He explained that no CEO or smart board member wants a dividend cut on their watch and that while dividend increases were a nice feather in their cap raising a dividend that could not be sustained well past their retirement (CEO and board members) was something they all tried to avoid. When he saw the increases rolling in from companies who were conservatively managed he used that as confirmation that while some might think the economy and/or bull market was a bit long in the tooth those closest to reality believed good times were here for years to come.
I never met a guy who could ride a bull market as long as he could, sit through as many corrections and not even be tempted to lighten up. And then in August of '87 he called me to give me a heads up that while he was not selling anything in his carefully chosen portfolio he was shorting 10 Dec. S&P contracts -- the big ones as the emini did not yet exist -- because by all historic measures the bull was simply overdone. When I asked him what he expected he told me that he had no idea what would happen but all he did know was that it was time for him to be more cautious because only fools could possibly be the fresh money pouring in and he hated to be allied with them.
For those careful, patient souls looking at the market as you and Nitro do is classic investing that pays a lifetime of dividends. Meanwhile I will head out and see if I can scalp 4 ticks somewhere ... lol.
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