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Weekend reading: Why passive investors should give up on perfection

Weekend reading

Good reads from around the Web.

Unlike most blogs, I don’t pay much attention to who linked to me in the past week when I choose what to put into Weekend Reading.

Instead the articles are mainly drawn from a stable of regulars, plus a few gems I come across on my travels.

And that’s good news for Rick Ferri, who I feature almost every week here, and who to the best of my knowledge has never linked once to Monevator.

Yes, it smarts a bit – not that he doesn’t link to my stuff, but that he hasn’t even patted the poor old Accumulator on the head.

Imagine! It’d be like David Beckham hollering “great pass” from the sidelines of your first born’s five-a-side football match!

Analysis paralysis analyzed

Mr Ferri writes such consistently excellent stuff that his position here is pretty secure. (Your need for quality reading is more important than my ego.)

Take his recent article on how some passive investors swap divining the future of individual companies for the equally elusive hunt for the perfect portfolio.

The result, he says, is “analysis paralysis”, where a would-be investor ends up sitting on his or her hands (or worse, spending their savings) when they should be getting on with investing and life.

Happily Ferri has a cure for analysis paralysis:

First, come up with a couple of portfolio choices that make sense, given your long-term goals.

Second, pick one.

It doesn’t matter which choice you pick because the probability of being right is the same for both. It’s not possible to know if a 70% U.S. stock and 30% in international stock portfolio will beat a 67% U.S. stock and 33% international stock portfolio. We do know the difference in returns will be negligible. So don’t become paralyzed over the decision.

What matters in successful portfolio management is deciding upon a sensible allocation based on your needs, filling those allocations with low-cost investments such as index funds and ETFs, and then staying the course through all market conditions.

I made a similar point the other week when I featured a post from the other titan of US passive investing, Larry Swedroe.

I wrote:

Be sceptical whenever you see anyone presenting ‘proof’ that you should put 2.33% in Spanish equities or 1.72% in the utility sector or anything like that.

This sort of fine tuning reveals that they’ve mined a database for specific and unrepeatable outcomes in the past. It tells you little about your future.

Instead, favour logic and simplicity over spurious accuracy.

Here’s another thing to consider. Besides the futility of seeking a ‘perfect’ asset allocation, you’re also wasting a lot of time and energy.

Yet passive investing is supposed to be simple and less stressful.

It’s a free side benefit that comes with doing better than most investors who try to chase outperformance, and it’s a shame to give it up to long, pointless nights with a calculator.

From the blogs

Making good use of the things that we find.

Passive investing

Active investing

Other articles

Product of the week: Nationwide’s FlexDirect current account will pay 5% on balances of up to £2,500 for a year. It’s a great deal, says The Telegraph.

Mainstream media money

Note: Some links are to Google search results – these enable you to click through to read the piece without you being a paid subscriber of the site.

Passive investing

  • Checking in on eight lazy portfolios – WSJ
  • What’s in my multi-asset ETF? – ETF Database
  • Time to say goodbye to the ‘lost decade’ for US stocks – Vanguard
  • ‘Formula X’ beats the S&P 500 – Roth/CBS

Active investing

Other stuff worth reading

  • In defence of working from home – Slate
  • What low interest rates mean for stocks – Swedroe/CBS
  • Beware if the inflation genie escapes [Search result]FT
  • The case of Brussels and banker’s bonuses [Search result]FT
  • Bank of Ireland triples tracker rate mortgages – The Guardian
  • How to protect your cash from the falling pound – Telegraph
  • Commuting has always been a P.I.T.A. [Old photos]TIME

Product of the week: Oh dear, I stayed with friends the other week and fell in love with their super high-end coffee machine. The only thing missing was an Italian exchange student/barista with a winning smile. Of course, after 20 minutes trying to justify the cost with a spreadsheet (I rarely buy High Street coffees, so no easy win there) I resigned myself to my £10 caffettiera. But if you’re one of Monevator’s surprisingly numerous super-wealthy readers, this is one indulgence I envy you and I don’t think you’ll regret!

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{ 12 comments… add one }
  • 1 Jane Savers @ The Money Puzzle March 2, 2013, 1:55 pm

    Whenever David Beckhams name is mentioned there should be a photo provided. Preferably one with his shirt off.

    This could drastically increase the number of women who read your blog.

  • 2 The Investor March 2, 2013, 1:59 pm

    @Jane — Ha!

    @Fellow Bloggers — Also, I am thinking I may have come across as uncaring of your links to me. I love them! I just mean I don’t operate a strict one-in, one-out link policy here. Please keep linking away. And it keeps you on the radar, too. 🙂

  • 3 ermine March 2, 2013, 3:59 pm

    To cool the coffee machine envy – think only of how much of a bear it’s going to be to clean out. The whole milk and heat thing is almost worth paying some grunt at Starbucks to decoke the machine for you as well as serving you coffee 😉 We bought a Delonghi on project for work years ago and used it all of about twice.

    And thank you for the links, as well as the most succinct description of who you borrow money from that I’ve ever heard!

  • 4 Alex March 2, 2013, 5:51 pm

    I agree: Bryan Ferry, er, Rick Ferri is well-informed and writes succinctly. Though he always flogs his books and company, as I’ve said before. Larry Swedroe is excellent, too. But then so is Allan Roth.

    Thanks very much for having brought them to my attention. I’ve obtained hot stock picks from all three. I’m understanding, right?

  • 5 gadgetmind March 2, 2013, 6:06 pm

    I’ve got a battered stove top espresso maker that I bought in Spain for a few Euro. It gets run on at least a daily basis and is still going strong after many years but has needed the handle re-attaching with Araldite.

    Sadly my wife shops at Waitrose, so the coffee we run through it has probably cost enough to buy a fancy-pants machine!

  • 6 Dave March 2, 2013, 7:07 pm

    @alex to be fair to Rick Ferri selling books is his job. And he gives away one of his books for free. I guess a lot of passive investors are philosophically attached to low costs in investing. But it may be true active managers cannot beat the market adjusting for risk. This does not rule out any advantage in financial advice though. Individuals maybe be unable to asses their own attitude to risk, may lack the tools to make judgements(student pods, fine wine, ostrich farms) may find specialist knowledge hard to acquire(tax and pensions). Some may also have a high value on their own time.

  • 7 Rob Brennan March 3, 2013, 12:17 pm

    I’m with you on the stovetop espresso pot gadgetmind. My ex is Italian and I spent lots of time in in and around Italy. Never once did I see an elaborate coffee machine in someone’s home. Bialetti all the way.

  • 8 David Stuart March 3, 2013, 4:57 pm

    monkey with a pin

    how much has the stockmarket gone up since he said cash is better?

  • 9 Dave March 4, 2013, 10:00 am

    @David Stuart I don’t think Monkey With A Pin said cash is better, but more that investors do not make the high stated returns on the stock exchange as cost and events such as fees, poor trading and survivorship bias drag the reported returns from stock ownership down by 6%.

    His advice seemed to be to minimise costs and trading(picking either a tracker or 20 shares at random and holding). And a retail investors should consider cash more favourably than they are lead to believe by an industry that markets the main alternatives.

  • 10 The Investor March 4, 2013, 11:35 am

    @Dave — I think David may be referring to this guest article on Monevator by Pete Comley, author of Monkey With A Pin from last June, in which he wrote:

    At some point in the next few years, I think there is a good chance that asset prices will mark a significant low point. If you go back to FTSE chart I showed earlier, there has to be chance that we’ll see another stock market low before we finish this secular bear market.

    While I didn’t agree with Pete’s call then (or in hindsight! 😉 ) I would note that eight months isn’t very long in investing terms, and he could still get his big correction, albeit he’d need a bigger one now, with the FTSE 100 having advanced 15-20% since then.

    However I think it’s as good an example as any of how difficult market timing is, and how most get it wrong. Pete’s thought long and deeply about this — he wrote a book — and so far the market is well against him.

    Remember, bearish opinion *always* sounds smarter then optimism. To many I’ve sounded like a clap-happy Panglossian muppet with my head in the clouds for much of Monevator’s life! 🙂

    @Coffee lovers — Hmm, my ex had a stove-top coffee thingie, too. It did make good coffee. 🙂 I think of purchases like a £1,000 coffee machine in terms of percentage of net worth. (I think of bigger things like cars or similar like this, too)

    Unusually (I don’t want to buy stuff much) I might be prepared to spend 0.1% of my net worth on such a machine, for the rare moments of joy it served me (Ermine’s cleaning warning aside!) when I was using it. So one for the millionaire list!

    @Alex — You’re almost doing it right, but I think you’d be better doing it with a spreadbet. 😉

  • 11 ivanopinion March 12, 2013, 3:29 pm

    I agree that there is no such thing as a perfect level of asset allocation. If so, then doesn’t it follow that not only should you not waste time agonising over your exact asset allocation, but you shouldn’t waste transaction costs on rebalancing your portfolio unless there is a massive swing from the asset allocation that you started with?

    For instance, I think my portfolio has approximately 30% in the US equity market, which seems approximately right to me. But there are a lot of other figures that would also seem approximately right to me. I don’t want to be overweight on US equities, because I think the US market is massively overvalued. But equally the US market is such an important market that I would not want to have less than, say, 20%. So, I would be fairly happy if the US component of my portfolio fluctuates anywhere between 20% and 40%.

  • 12 gadgetmind March 12, 2013, 3:32 pm

    If you want to see people over-thinking asset allocation, then read up on the “efficient frontier”.

    As for the US market, who knows? If’s one of the few developed markets that’s got room to grow, a reasonably well educated work-force, world-class technology, and cheap labour on its back door.

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