Monday, December 26, 2011

Swedroe: Indexing is a Rational strategy

Larry Swedroe (a passive index type of investor) makes the argument against investing based on news driven fundamentals (link).

>>
The reason is simple. If we know there are problems, the market surely also knows and that means the problems are already incorporated into prices. And why would you buy when things look safe, and thus valuations are high and thus expected returns are low, only to sell when risks show up, and thus valuations are low and expected returns are now high? That doesn’t seem like a rational strategy, yet it is exactly what most investors do, and it explains why they do so poorly, underperforming the very funds in which they invest.
>>

Many folks that I observe on the Internet do just that, investing in what WAS the best performer, which often turns into the worst performer going forward.

I like to look at fundamentals, technicals, sentiment, cycles and seasonality. Yes, there are successful investors that primarily focus on one kind of data, and mostly ignore the others. Yes, a person can become overwhelmed by amount of data as well. I tend towards simple in terms of analysis, but look at most indicators.

As I always tell others, finding your own style is perhaps the most important step in becoming a successful investor or trader. That successful style for you, may lean heavily towards one kind of data, or it may be a more holistic approach as I tend towards.

For the majority of average folks, the clearest path is the Swedroe approach, passive low cost indexing and asset allocation (the Boglehead way, link to forum). It has proven over time to beat 80% of other investors using every thing else. Of course it tends to give up the chance for grand slam home run investments, but only a very few have any realistic chance at those kind of results, and those few tend to have extreme talent, and/or extreme luck.

Obviously, as an active options trader, I stray far from the Boglehead way. For the vast majority of every day folks that don't have a burning passion for investments, I still believe that low cost indexing is the way to go.

No comments: