I remember the day Alize picked up her burnt coffee off the trade desk, took a tiny sip and turned to me, “Do you ever feel like you have been hallucinating? Or.. almost like you are cheating yourself?… Most of us think we have an edge in managing our own investments because of where we work and our academic track records. But it’s an illusion, a false notion. My bet is pretty much any unbiased grad student could rip this apart if they could access the data. We’re hallucinating”.
Alize was onto something when she ventilated this that rainy day in April. It is very very hard to outsmart a very very large sample size of intelligent counterparts – particularly if you think you will be doing so in your spare time and with a major cost disadvantage. I don’t bother trying for ~70% of my portfolio.
The details really matter here though.
What defines this magic ultra low cost passive index portfolio that we should all just do and forget about exactly? Market value weighted ? Is is 60% equity / 40% bonds? What equities? Just the S&P 500, the Russell 2000? Should we through some Europe, Asia and Canada in there? How much? Should we own preferred shares instead of some corporate bonds in taxable accounts? Should anything be rebalanced as values change? By who? What will it cost if someone is rebalancing? How do I know if they know what they are doing? What if I am actually engrossed in markets and enjoy looking for individual companies or themes to invest in?
Many low cost passive indices have outperformed active mutual fund managers over long periods. Passive, market-weighted index investments have not outperformed all managers and active screening processes however. Choices need to be made even if you are combining numerous passive indices to create your portfolio. Other important calls still need to be made as well. Things still need to be managed. Excellent shorter term trades can also be had in that 5% to 10% of the time / market where inefficiency exists – usually thanks to our psychological biases and emotions. Certain types of companies need to be owned individually as well.
We will take a shot at these questions and much more here. All the same, your experiences, counterpoints and suggestions are only relevant if you share them as well… “Knowing and not doing is the same as not knowing”.
Making It Happen 