(27-12-2016, 02:29 PM)hailstorm87 Wrote: [ -> ]Hi guys, I am still relatively new to investing and have read a bunch of literature to support the view that index investing is the 'way to go' for a passive investor who is looking at returns of 6-7% per annum (through dollar cost averaging) over the long term on equity ETFs (e.g. STI, VWRD, A35, VUSD.L). This is of course contrasted with the 'value investing approach' - which is to buy individual stocks at an undervalue with the long term hope/ view that the markets will come to fully value such stocks.
I believe the main literature supporting this view is 'A random walk down wall street' and this has spurned a large move into ETFs (such as the Vanguard funds) in the recent years. In sum, the main takeaway of the book is: it is almost impossible for the average investor to beat the market returns since the market is almost always perfectly prices and only the very best money managers can ever generate the 'alpha' to justify active management of funds. As such, it would be best to have the active management be done by the 'professionals' and average investors (like myself) should not even attempt to pick individual stocks.
Would love to hear of the views and experiences are on this topic.
(Mods: In case this topic has been created previously, please have this merged to the relevant thread. Thanks!)
Hi Hailstorm87,
My view on this for what it is worth is that the maths behind the whole indexing theory can be loosely summarized as below.
Let us assume you are a 'professional' investor and let us assume that I am the 'average' investor.
Let us also assume we are the only two investors in the market.
The total market return is let us say 8%.
As a 'professional' investor, your costs are around 2%.
As an 'average' investor, if you use an index fund (with cost of 0.3-0.5%) and accept the market returns, your return will be 7.5-7.7%.
In which case, the 'professional' investor can only make 6% (after costs) i.e. the 'average' investor will do better than the 'professional' investor. By accepting you are 'average', you will do better. In general, investors do not like to accept they are 'average'.
Of course, if the 'average' investor incurs losses, then the 'professional' investor can make higher than market returns, i.e. capture the returns from the 'average' investor.
Having said that, clearly, one has to believe that,
1) I as an 'average' investor have no edge over a 'professional' investor.
2) My best bet is to dollar cost average and reap the benefits of an index constructed by 'professional' investors.
In my experience, across around 76 trades, with an average holding period of 1.5-2 years, I have observed an out-performance of around 5% on average over the index in Singapore Exchange trades. The positive trade ratio was around 76%, i.e. 76% of the trades were gains
In overseas markets (NASDAQ, NYSE, Xetra, Paris, LSE, AEX) , across around 390 trades, with an average holding period of 1 year, I observed an out-performance of 10% on average over the index. The positive trade ratio was around 46%, i.e. 46% of the trades were gains
However, it is very time-consuming and I was not able to convince myself that I was out-performing because of any noticeable edge in stock picking. With a positive trade ratio of around 46%, it was no better than chance, in my opinion.
In addition, work pressures increase as you grow older and I was not able to devote the attention one needs to devote to it.
As a result, I have slowly started to my portfolio to consist of ETF to obtain exposure to various countries / markets (S&P 500, Nasdaq, DJIA, Europe, ASX, CSI, Japan etc).
When I say slow, I mean really slow, so, over the last four years, slowly, ETFs are around 60% of my portfolio now.
One thing I have noticed with ETF investment is that growth is really slow, like watching grass grow.
I sometimes fondly remember the excitement with which I scooped up Keppel Land at $1.09 and watched it turn into a multi-bagger (including dividends) by the time of its privatization. However, I then remind myself of the disaster that was NOL, bought at the time of Rights for 1.6 and then rights at 1.3 and held for close to seven years and had to watch it being acquired for the same 1.3, so, 0% return for 7 years sunk cost and all the stress of seeing it plunge below 80 cents, with a nearly 50% paper loss at one point.
In contrast with those 'exciting' investments, the STI ETF which i bought for 3.2 in 2013, at its lowest went to 2.6 and has rebounded now to around 3, i.e. a maximum drawdown of around 20% (which actually was the trigger for me to buy some more).
Within the ETFs, the most 'exciting' one is the China ETF, which is a roller-coaster ride, but since it is only 5% of my portfolio, it is tolerable.
The second thing is that it is not at all interesting to talk about ETF investing in your average small talk with colleagues etc, however, if you are investing in something like Sembcorp, Genting, Vicom etc, you are likely to be way more popular. If you are talking ETF, Random Walk etc, most people's eyes just glaze over and they mumble their excuses and leave.
One other thing, I would recommend that you do not believe statements like "Markets are perfectly priced". In the long run, probably, they may be perfectly priced, but there is enough irrational behavior in the markets for an investor to benefit from, if one has the inclination to do so.
The most important thing is to only invest in something you genuinely believe in. Investment is a 'brutal' business and takes no prisoners. I have seen a few instances of my friends burn their fingers very badly some in 2008 and then a few others in 2013.
I hope this is helpful.