Good reads from around the Web.
Many economists claim that all investors are rational and that all known facts are incorporated into prices.
I think differently.
That doesn’t mean it’s easy to beat the market – quite the opposite, it’s demonstrably incredibly difficult and most people shouldn’t try – but that’s another matter.
A suitably advanced alien onlooker or an all-seeing God could tell you how many people are standing on one leg on the planet Earth right now.
It’s a knowable fact, but you or I would just be guessing.
People who write about investing (myself included, no doubt) detract even more credibility from the rational market school of thinking.
Frequently you’ll read statements that are just plain silly.
For instance, I regularly hear US ‘experts’ proclaim that the rise in popularity of index funds and ETFs in the past few years is due to the steady rise in the value of the stock market.
But that’s just a US perspective, with its main markets hitting all-time highs on a regular basis in 2014.
The growth of indexing has been just as visible in the UK.
Yet our leading market – the FTSE 100, down again in 2014 – is still below its peak achieved in 1999.
The active edge that isn’t
On the same note, we often hear some of those US pundits proclaim that people will abandon index funds for active funds when a bear market strikes.
Articles like this recent anti-indexing one in Market Watch claim that “stock pickers have an edge in a downturn”.
Are we really going to have to spend another year debunking this stuff?
Firstly, the market consists entirely of stock pickers and passive funds (the latter being by definition neutral)
So for every active stock picker who wins there must be a stock picker who loses.
The claimed “edge” is therefore a mathematical impossibility.
Secondly, you might ask why indexing is growing in popularity in the UK, where as I say our leading index is yet to recover from the past two bear markets?
The answer might be that at least some of those who tried active funds have discovered they were scant protection from the bear market in 2008 and 2009.
Market ups and downs are unknowable, but costs are nailed-on.
Why is this so hard for people to grasp?
Not quite a road to nowhere
Anyway, while the woeful headline performance of the FTSE 100 over the past 15 years seems about as good an advert for tracking an index as North Korea’s economy is for collectivism, it’s not been quite as bad as all that.
Dividends, dear boy, dividends.
Hargreaves Lansdown notes that:
‘It is easy to look at the level of the FTSE 100 and to conclude the market has gone nowhere for 15 years, but even someone who invested £10,000 in the UK market at the worst possible time would now be sitting on £17,206 with dividends rolled up.
That said, it has been a white knuckle ride at times, encompassing the tech crash, the global financial crisis and two bull markets. But despite all that, the equity market has delivered significant returns ahead of inflation for long term investors.’
The other thing to stress is a properly diversified passive investor would only have a portion of their assets in UK equities.
You’ll have made good elsewhere while the FTSE 100 has wobbled nowhere, just as the US markets will likely one day disappoint and the FTSE 100 prosper.
What nobody should be doing is looking for silver bullets.
As Ben Carson writes:
“There are no shortcuts to the process. It’s never going to be easy. No one is ever going to be able to guarantee you an extremely high return number year in and year out. The markets just don’t work that way.
But some people really want to believe that it’s possible. They want the Holy Grail of investing with all of the upside but none of the downside.”
You want 15% a year guaranteed? Get thee to a fraudster!
Here’s to another year of investing ups and downs.
From the blogs
Making good use of the things that we find…
- The folly of forecasts – Canadian Couch Potato
- Ready to increase global equities [Pretty active-ish?] – Rick Ferri
- Investing on auto-pilot – The Escape Artist
- “Buy Europe” – The Reformed Broker
- How to invest like Sherlock Holmes – Millennial Invest
- The drivers of 0% rates and low wage growth – Investing Caffeine
- Another deep dive into the decline in the oil price – Econbrowser
- The trouble with ‘socially responsible’ funds – Bankers Anonymous
- It’s winter: Get outside and enjoy it! – Mr Money Mustache
- How money can sometimes buy happiness – Nerd’s Eye View
- 3 powerful lessons from lifestyle guru Tim Ferris – Addicted 2 Success
- Far too many strong articles around for blogging comfort! – Rockstar Finance
Product of the week: Halifax and Lloyds Bank – owned by the same company, of course – have launched new 34-month 0% offers on credit card balance transfers, reports The Guardian. Such deals can be handy for helping manage down debts (or even for generating a profit in nimble hands) but don’t use them as an excuse to rack up more problems.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- There will be active decisions in a passive world – Bloomberg View
- Huge John Bogle interview [I missed this before Christmas!] – ETF.com
- And also this Buron Malkiel interview [Hey, it was hectic…] – ETF.com
- Swedroe: The shorting premium [Warning: A bit technical] – ETF.com
Other stuff worth reading
- 14 meaningless stock market phrases – Business Insider
- Average Bank of Mum & Dad deposit hits £18,505 – Telegraph
- More on house buying in 2015 – Telegraph
- 8 secrets of success from early retirees – Market Watch
- What’s your number? – The Certifiable Planner
- Cancer is “the best way to die” says doctor – Telegraph
Book of the week: The science of spending is getting more nuanced. Happy Money recaps what we know so far about buying happiness. It was actually released in 2013, but seems to have hit a few blogger’s consciousness in recent weeks.
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- Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]