I get a kick out of this. Try finding a book (any book) on finance that makes this claim:
Statistically speaking, the odds are that you can pick actively managed mutual funds and create a portfolio that will beat—after all fees and taxable expenses—a diversified basket of stock and bond index funds. Or, if you can’t do it yourself, the odds are that you will find someone who can.
OK—you’d think you could find the above claim somewhere, right?
But after reading more than 300 finance/investment books, I have never seen a book (or an academic study) state this claim. In fact, the exact opposite is true–consistently. … read more
Yet advisors and salespeople try telling you that it’s easy to beat the results of a bunch of indexes. They’ll come up with all kinds of excuses suggesting that you should invest with them. But no studies can be found to support their claims. Shame on “advisors” for putting the odds of success against you!!
Burton Malkiel and Charles Ellis have teamed up to create a nifty little book, The Elements of Investing. These Ivy League professors have been shouting out their message for years along with their peers, including a string of academic Nobel prize-winning laureates who suggest that the products sold by most financial planners are definitely not the way to go.
This book is great for a first-time finance reader. There’s a bit of terminology in the foreword that might catch a few people off guard, but if you can get your head around a few of the sticky terms, it should be relatively easy reading.
There are some financially educated people who read this blog, and if you’re picking up this finance book with the hopes of understanding it, perhaps they can help.
If you have a question pertaining to anything in this little book, please put your question in the comment section provided. I (or one of my other readers) will be glad to help. And others, who see our questions and answers, will be able to learn from the thread.
I hope you get a chance to read the book–and learn from it.
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Andrew Hallam says:
May 12, 2010 at 4:39 pm (UTC 8 )
You’re welcome Natalie,
Harry’s exchange traded index funds were purchased off the Toronto Stock Exchange, so they’ll have different ticker symbols to what an American buying off the New York Stock Exchange would have. But still…the premise is the same.
What’s interesting about Harry’s account, also, is that it reports in Canadian dollars. Because the Canadian dollar has gained about 14% on the U.S. dollar over the past year (and roughly that amount since Harry started his account in 2008) then the returns for Harry’s account would actually be far higher if reported in U.S. dollars. For instance, a 3.5% Canadian dollar gain (under these circumstances) is equivalent to a 17.5% gain in U.S. dollars, since August, 2008. Considering that the world stock markets are currently lower now than they were in August, 2008, I see Harry’s performance as spectacular. He benefitted from having a balanced account of stocks and bonds, and then responsibly rebalancing them when the markets plunged in 2009. The nice thing about having a balanced index (as with Vanguard) is that Vanguard will automatically rebalance it for you. Harry was driving a stick shift. For Americans, Vanguard lets you put the vehicle in cruise control.
Kevin@InvestItWisely says:
May 12, 2010 at 10:22 pm (UTC 8 )
Hey Andrew,
I really like your long-term perspective. Whenever I start feeling a little iffy because of all the bad vibes out there, it’s important to remember that I’m doing this to reap the benefits in 25 years or so, not in the next 5! That’s a good point about dollar-cost averaging, as well; if you have the funds and you’re in a bull market then perhaps a lump sum is better; I’ve seen a couple studies recently that confirm this over the long run.
Thanks for the detailed explanation about the loads and fees, as well. I haven’t had the chance to confirm with my girlfriend and her advisor, but the situation seems to be almost exactly how you explained it. I am slowly convincing her to trust me as an advisor, instead… and in turn I look up to the wisdom of people who know what they’re talking about, like you
Latham says:
May 13, 2010 at 2:41 pm (UTC 8 )
@Andrew Hallam
Thanks for helping to clarify that Andrew. I definitely see your point about the importance of looking at things in the 30 year time frame instead of the next few years. See you on Wednesday.
kris says:
May 13, 2010 at 9:48 pm (UTC 8 )
Hey Andrew,
Above you mentioned dollar cost averaging like visiting the supermarket every month. Am I buying milk, a necessity, or “treats” that I can wait for to go on sale? Is it worth having an unbalanced portfolio, stock or bond heavy, because the market is favorable to buy one or the other or is it prudent to simply maintain your asset allocation percentage regardless?
Thanks for all the help fella.
Cheers.
Andrew Hallam says:
May 14, 2010 at 8:09 am (UTC 8 )
Hey Kris,
History is full of peope who “overweight” in an area they think is going to do better than another. But the end game reality looks a bit like a scrapyard. Everybody thinks they can out-think the market and the public, but long term, if people keep trying, they end up disappointed. They might get lucky the first time, or the second time, but being right once becomes the kiss of death, as far as financial productivity is concerned—because those same people will want to try that stunt again. On the other hand, rebalancing mechanically makes you contrarian, by nature. In other words, when stocks are falling, you rebalance by buying stocks. When stocks are rising, you rebalance by buying bonds. This is going to be tough to do because every news article will be screaming the opposite. This is why Buffett suggests that investing is simple, but not easy.
Thanks for the comment—cheers, Andrew
Nathan says:
May 14, 2010 at 10:03 am (UTC 8 )
I think I found my answer from the questions below. You don’t recommend ETF’s for Americans. I think I need to buy some international index funds, after I buy a few more bonds to get closer to 40% bonds, and I was thinking of ETF’s. Vanguard is advertising commission-free ETF’s, see below. Is it still better to not buy ETF’s for Americans? Are there any advantages to ETF’s over regular index funds for Americans? Thanks Andrew!
“Investing costs for Vanguard ETFs® and stocks just dropped substantially. Vanguard now offers:
Commission-free Vanguard ETF® transactions. Vanguard brokerage clients can make commission-free transactions in our entire lineup of 46 low-cost ETFs—the largest suite of ETFs available without commissions.
Ultralow equity commissions. Most Vanguard brokerage clients will pay $2 or $7 to trade stocks and non-Vanguard ETFs. (Some clients will receive 25 commission-free trades; others will pay $20 after 25 transactions, as shown in the accompanying table.)”
kris says:
May 14, 2010 at 1:52 pm (UTC 8 )
Thanks Adrew,
No problem for that idea here. If you are telling me the fast easy way is better I think I’l find a way to cope! I’ve got better things to do!
Andrew Hallam says:
May 14, 2010 at 2:11 pm (UTC 8 )
Ahh, Vanguard just keeps getting better and better. Thanks Nathan. That’s super news.
I didn’t recommend that Americans not buy ETFs. Vanguard indexes are just a lot easier to buy, and they have been commission free forever.
With ETFs, the fees are even lower, so if you want to drive a stick shift, go for it. If you want an easy option, you can buy a Vanguard target retirement index fund, which will increase its bond allocation as you get older—thereby increasing your safety. If anything happens to you, it will be easier for Stacie to understand the target retirement fund as well. Just a thought, in case you ever feel like getting into one.
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