I have read books and articles that suggest being a passive investor and
using market etfs. At least that's my understanding of what they are
trying to say. There was a recent suggestion in this group of some book
by Swedroe which I think goes for similar strategy.
I was wondering if this is applicable anymore at all.
you click on 10 years link, it essentially goes from about 1400 to 1100 (showing -26%)
I don't know if/how ETFs differ from this graph in terms of actual
performance in any substantial way.
To me 10 years is long and I wonder if this approach is useless in
practice. The graph says passive investing by market etf may be a
The reason for the post is basically I want to know that I am not
completely off in my understanding.
I've been sitting on cash for more than a year (that happened to be good
market timing in terms of the exit) and trying to figure out what my
strategy should be (I am not a professional investor).
If I were to try to learn 'fundamental analysis', any good book suggestions?
A good compromise between fundamental analysis and index funds is to
rely on newsletters. You can choose bond or equities, individual
stocks or mutual funds, what ever you like. Typically they hold two
or three portfolios and make trades based estimated performance.
Go to the library and find Hulberts newsletter. This one ranks all
the other newsletters. You can pick a newsletter that you like.
Absolutely, "Security Analysis" by Graham and Dodd. Warren Buffet
studied under Ben Graham, and look where he is now.
In your question, you offer the ten year S&P index return.
I'm compelled to make two comments. First, the index ignores dividends
which would increase the calculated return. Second, in down markets I
"always" beat the index. Bragging? Hardly. My cash, even at
Or, instead of manually putting a newsletter into practice, you can
directly invest in etf's or funds that implement a newsletter's picks
. Maybe there are otherexamples of this.
That particular family has stumbled the last few years because their
momentum approach is bad in a choppy market. But the newsletter did
spectacularly well in past decades and funds did pretty good until
recently. I like their systematic approach which was easily
automatable into mutual funds, without having to wonder if some
whimsical manager was wasting money window dressing etc.
Ibid, Joe Taxpayer, with a specific to get the 6th edition "Security
Analysis." It's more thorough than "The Intelligent Investor."
In addition, I suggest that if you were good at stacking blocks in
kindergarten, then reading annual reports will be a piece of cake for
you. Scan the report for the charts on earnings, and look for bigger
stacks as the years go by. This is not a guarantee, but it is a better
place to start than a company with erratic earnings. (I'm not actually
being 'too funny' here - selecting a portfolio of really solid
companies, serious about their business, is not rocket science.)
About a year and a half ago I pulled some stocks out of the top of my
hat. I am a lazy man, and a real genius at avoiding hard work, so you
can be assured I do not know a single one of these ten companies
backwards and forwards. But I do know they all have good earnings
(until BP, that is), and I know a little about their products and
their markets. Joe Taxpayer probably would come much closer to
understanding all the accounting than myself.
I messed up a little with the targetted amounts and with the website,
so it's not perfect balance, but it's pretty close, and there's an
index Tad Borek suggested to compare to.
Use your head, do some work, and do not be greedy - be practical.
Which ones? And what kinds of strategies and asset allocations are
you talking about?
There's a difference between "dump all my money into an S&P500 (or
similar large-cap equity) fund" and "build a diversified portfolio
covering different asset classes to match my risk tolerance and time
horizon, reblance as necessary". Both are strategies which could be
implemented via low-cost index funds. Or they could similarly both
be done in inefficient ways with high-cost funds.
As someone else mentioned, you're ignoring dividends.
It says no such thing. Passive investing may, in fact, be a losing
game, but that graph doesn't say so. The graph just tells you about
the price performance (not the total return) of a single particular
The granddady of them all is Security Analysis by Graham and Dodd, but
before you dive into that, I think you might benefit from
understanding more about investing in general, styles, history and
results. Perhaps your first stop should be A Random Walk down Wall
Street. It's got a nice survey over index, fundamental, technical
analysis, historical performance of various styles, etc.
You might also enjoy reading this article:
It's got some great illustrations of the effects of asset allocation
and the benefits of diversification. And it's very concise.
This one does, in rather Swedroe-like manner, an exercise in starting
with a very simple 60/40 Sp500/GovCredBond portfolio and a little bit
at a time adding in other asset classes and vastly improving
diversification -- and showing how those changes affect historical
volatility and returns.
Most of the time periods covered are roughly 1970-2009. History will
most certainly not repeat itself just like that time frame, but it did
cover a period including a massive bear market, the huge inflation,
vast rise in bond rates, then - and this is important - over the
course of 20 or so years, interest rates going from those huge highs
to their present low rates. Don't for a second think that interest
rates are about to drop *again* the way they did. Nevertheless, it's
As to whether it's worth your time to try to beat the markets on your
own via fundamental analysis, well, it's possible you can. But not
especially likely, not on a risk adjusted basis and accounting for how
much time and effort you'd need to put in. You might just do a lot
better for a lot less effort with a few well chosen ETFs and the right
asset allocation -- and the discipline to stick to the plan. It's
that last bit which might just be the hardest part.