tag:blogger.com,1999:blog-5465015914589377788.post5624765393001889720..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Arguments Against Index InvestingMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger7125tag:blogger.com,1999:blog-5465015914589377788.post-85959090717158103782020-11-07T08:22:09.351-05:002020-11-07T08:22:09.351-05:00The following exchange is reproduced to remove bro...The following exchange is reproduced to remove broken links.<br /><br />----- BHCh July 7, 2017 at 12:24 PM<br /><br />We have ~30% in index funds. And then another ~40% in supposedly active funds which are closet index funds. Altogether, way more than half the stock market = index investment. At what point active management will start beating the index? I don't know, it has not been tested.<br /><br />----- Michael James July 7, 2017 at 1:46 PM<br /><br /> @BHCh: It's impossible to tell the exact point when active management will get an edge, but from the analyses I've read, the ways that active management could exploit index funds' forced trades seem thin enough that the transition won't come until more than 90% of money is in index funds.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-7011037799901465762017-07-07T20:19:35.651-04:002017-07-07T20:19:35.651-04:00@John: When it comes to costs, I add in the cost o...@John: When it comes to costs, I add in the cost of lack of diversification. If you're able to choose above-average stocks, then this doesn't apply. But for me, I assume that my choices are essentially random. This means that there is a compounding cost to being less diversified. At 28 stocks, this cost is higher than the 0.16%/year my index ETF portfolio pays in MERs, commissions, spreads, trading expenses within ETFs, and foreign withholding taxes. So, I prefer maximum diversification and low fees to owning stocks directly. Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-34533906130534771352017-07-07T16:47:41.619-04:002017-07-07T16:47:41.619-04:00Point taken.
I should have gone into more detail....Point taken.<br /><br />I should have gone into more detail. I own 28 stocks split between two portfolios (my wife's and mine). They are diversified across all sectors except mining with three of them being US multinationals (for global exposure). <br /><br />I know what you mean about missing out on a few winners. My wife's portfolio has outperformed mine over the last 10 years due to a few superstars and one dog, while my portfolio has mostly strong performers with one dog. <br /><br />Also, just for fun I calculated my costs over 12 years. Get this 0.98%. And that is a one time cost. Not year after year after year. That has to count as an advantage of individual stocks over a fund.Johnhttps://www.blogger.com/profile/09014171319726764035noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-40455155716524016072017-07-07T13:53:22.350-04:002017-07-07T13:53:22.350-04:00@John: The labels "active" and "pa...@John: The labels "active" and "passive" are unfortunate. When investors own just a few stocks, it makes them active in this context, even if they rarely trade. They may be less active than those who trade frequently, but they are still somewhat active.<br /><br />Owning just 10 to 30 stocks from an index will track the index fairly closely for most short periods, but there is significant risk of not tracking well over the long run. If you happen not to pick a few stocks that become big winners over time, it's possible to trail the index significantly.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-12714033327946540282017-07-07T12:52:15.410-04:002017-07-07T12:52:15.410-04:00In regards to the debate about passive vs. active ...In regards to the debate about passive vs. active investing I totally agree that passive investing is the way to go. However, I don't think that purchasing an index fund is the only way to do this.<br /><br />Just because I own individual stocks does not mean that I am an active investor. An average of 5 trades per year (including initial purchases) over 12 years doesn't sound very active.<br /><br />Why not just look inside the fund to see what it is holding, then buy those equities in the same weights that the fund holds?<br /><br />You might argue that the cost of doing this is prohibitive. Well then just buy the top 10, 20 or 30 stocks. This portfolio will track fund's performance very closely.<br /><br />By the way, there is nothing magical about an index. It is simply a portfolio of individual stocks assembled using pre-determined specifications. Johnhttps://www.blogger.com/profile/09014171319726764035noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51788585799631206112017-07-06T15:22:51.693-04:002017-07-06T15:22:51.693-04:00@Devin: I've seen investors whose advisors we...@Devin: I've seen investors whose advisors were the ones who advocated selling one set of funds and buying another set. So, sticking to a plan isn't purely a DIY vs. advisor issue either.<br /><br />Can you point me toward a group of passive index investors with such extreme views? I tend to encounter many people who say nice things about index investing but don't quite index their own investments.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-75698191900268191232017-07-06T14:36:24.085-04:002017-07-06T14:36:24.085-04:00As someone who is an active investor I would still...As someone who is an active investor I would still say that passive investing is a perfectly reasonable approach and many of the objections are very biased. <br /><br />I don't think that not sticking to a plan is really an active versus passive issue either. It may be more so a DIY issue, but you can be DIY with active or passive investments. <br /><br />Finally I would caution that there is a certain group of passive investors that are almost extreme in their support for passive investing and opposition to active investing that I think is excessive. The biggest issue is are you getting the support and advice you need and keeping costs relatively low. Devinnoreply@blogger.com