Advocates of passive investing argue that i) most fund managers fail to beat simple indexes ii) it’s not possible to beat the market iii) market timing is a fools errand, so investors should focus on things they can control such as diversification, asset allocation, risk (as measured by volatility), costs and tax.
The particular mix of equities and bonds should be determined by factors such as age, investment goals and ’volatility tolerance’. As a general rule the greater the proportion of the portfolio invested in bonds the less volatile the ’investment journey’, with smaller draw downs in bear markets (this comes at a cost of course with lower long term returns).
These draw downs can cause investors to pull the plug and get out the market just at the wrong moment, selling assets when they are cheap rather than buying more. Having a higher proportion of bonds gives insurance against such poor decision making when the bear roars.
Perhaps it could be argued that some investors can consistently find alpha and beat the market (a famous example of course is Warren Buffet) but private investors should ask themselves ’Am I smart enough beat the market?’. I think it’s a surer argument to say I am no Warren Buffet and neither are most investors!
Here is a list of reasons why I like passive investing in low cost index funds:
- Savings are paid in monthly regardless of market sentiment.
- If the market is up then my portfolio is worth more.
- If the market is down then my monthly deposit buys more!
- I avoid having to predict macroeconomic outcomes and second guess market
reactions e.g. euro will breakup killing European equities and cause a flight to US dollar. - I can ignore the noise and daily fluctuations of the market.
- Relatively small amounts saved every month build up to large sums over time.
- Emotions are removed from trading as monthly deposits are done automatically.
- ’Fire and forget’ process means I can forget about investing, spend time on other matters and know I am still invested and ’still in the game’.
For those who wish to know more I can recommend two books on the subject (both of which I’ve read).
’The investors Manifesto’ by William Bernstein
’All About Asset Allocation’ by Richard Ferri
I read something very thought giving (for me at least):
SvaraRadera1. You make money working with something you are highly qualified to do.
2. You invest the excess cash from that "work" in the stock market etc. You spread it around. The goal is not to make more money with your money (if you get my drift), it is simply to park it where it will beat the inflation (even after taxes).
You are making your money doing something you are highly qualified to do and then you park your money where it will not lose money. End of statement.
I find that ideal. Unless you are working as a trader (see point 1) or as a professional investor (investing other peoples money) you have no real reason to learn anything about beating the market. BUT you need to understand how to beat inflation (even after taxes). If you can do that, you will have beaten the market in great lengths already.
I live in Sweden too (I am swedish) and as far as I know, inflation has been (for the past 10 years) no higher than 4% a year and it often ends up somewhere around 2% (correct me if you find I am wrong in my statistical claims).
So if you can find an investment that gives you at least 2% AFTER tax, then you are at par with swedish inflation (as long as you keep SEK as your currency).
This is how I see it. People has to stop thinking they have to be investors. Use your work qualifications and make your boat load of money there and keep increasing your qualifications so as to compete with others in your field (at the same time increasing qualifications in order to earn more). Then spend less than you earn, place the excess cash in investments that beat infaltion after tax.
I know I am repeting this subject ad nauseum, but this is important. Please re-read this comment. It will make your life so much easier. Your job is not to be Warren Buffet, there are people with that job already. Your job is not to beat the market etc.
Hi, thanks for your comments.
SvaraRaderaI agree, simply beating inflation would put most people in a very good position. Wealth building comes from spending less than earning and saving the difference over the long term. Leveraging ones skills to earn more money is an effective way of increasing one savings potential.
Something else to think about is whether the time used in trading and trying to beat the market is time well spent. Say for example someone has 100.000 sek and instead of having it sitting in a savings account earning 3% they spend many hours analysing the markets, companies and macro trends and manages to increase their returns by 15%. This would result in an extra income of 15 000 sek per year but this must be put in context of the extra work that is required. If the investor puts in 2h per working day and uses one weekend day, then effectively that’s 2 working days per week, or around 100 per year. That 15 000 sek doesn’t seem so much money anymore for 4 months work!
Without checking, your statistics for Swedish inflation seem correct to me. I do believe though it will become more difficult for savers to beat inflation with simple savings accounts as most governments will follow a path of financial oppression to get themselves out of the current sovereign debt mess . That is to say interest rates will be kept below inflation, effectively taxing savers but relieving those in debt.
Sweden of course doesn’t have the same debt problems but we will not be immune to higher inflation globally and we will need to keep interest rates relatively low otherwise the currency will become too stróng, choking the exports industry.