Investment returns and trading styles

A recent thread on the Boglehead forum (passive indexers) surveys their investment returns for 2011 (link). Given that the stock market went basically no where, it is not surprising to see the bell in the curve dominated by 0% to 2.5%. Those indexers that did well were likely heavy in Treasury bonds or TIPS, those that did poorly likely heavy in Emerging Markets or Europe or Japan.

Elsewhere on the Internet, a person might read about fantastic returns, a few of which might even be true. I tend to think Bogleheads are more honest, more accurate in their reporting real world hindsight results than those on other forums. I reported that for 2011 I am slightly below the line for blog reported trades (less than a 1% loss).

On the other side of the spectrum is a 2012 investing thread on the PCGS coin forum (link2). The one week returns on page 5 of the thread, are better than the one year returns from the Bogleheads. Some folks, especially the inpatient, will point to that and say, "see it means I need to pick volatile, fast moving vehicles." Well, there is something to that, especially if a person is young with a high income and few responsibilities. There is also a wide gap between what people do in theoretical contests, or with a small trading account, vs. what happens to the bulk of their substantial assets (Boglehead way).

For those that are older, with more of an asset base, "gunslinging" or going "all in" with the bulk of assets, I see as a risky and foolish way to proceed, because there is less time to make up any losses. Many thrive on the adrenaline rush of being up or down 10% per month, and that excitement is another powerful lure, but it tends to come with a long term cost.

In the long term, only about 20% of active investors do better than indexers, often taking much more of their time, much more stress, and volatility in their results. In a self-esteem driven culture where most believe they are above average, it is what makes the markets turn. In the lower 80%, there is also a significant percentage that loses everything. The folks that get wiped out, tend not to report results, or respond to surveys, and tend to go for the riskiest most volatile vehicles. No one wants to believe that they will be in the lower 80%, but for average people, indexing is the low stress way, with an 80% chance of better returns to boot.

For those young people reading along, if a person has a talent, a knack, a passion for investments, the odds of being in the top 20% group tend to be greater. If a person is more driven by excitement, or ego, or other psychological factors, the odds tend to lower. Again, for short term trading, the first thing I tell people is the importance in finding your own trading style. For those just getting started, keeping a trading journal (which is what this blog is) is a powerful tool in finding what works for you, and what doesn't work.

Me, I tend to hate losing, and dislike taking any losses. So a style that generates a high percentage of winners, with a lower payout per win, tends to be a style that works best for me.