Blogs & Comment

Quotable guide to passive investing (IX)

Here is Part IX of the Quotable Guide to Passive Investing. Part I is here. To see Parts II to VIII, click on links at the bottom of each page.
A Random Walk Down Wall StreetBurton G. Malkiel
“With index funds, you know exactly what you are getting, and the investment process is made incredibly simple.”
“The most important decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money-market securities, etc.) at different stages of your life.”
“In the 1990s, the ratio of buy to sell recommendations climbed to 100 to 1, particularly by brokerage firms with large investment banking businesses.”
“Stock investors can do no better than simply buying and holding a fund that owns a representative sample of all the stocks in the market.”
“I am convinced that no one will be successful in using technical methods to get above-average returns in the stock market.”
“Again and again yesterday’s star fund has proven to be today’s disaster.”
“The laws of chance do operate and they can explain some amazing success stories.”
“I strongly suggest you invest some of your assets in REITs.”
“TIPS are great portfolio diversifiers.”
“Any truly repetitive and exploitable pattern that can be discovered in the stock market and can be arbitraged away will self-destruct.”
“Given enough time and massaging of data series, it is possible to tease almost any pattern out of most data sets.”
“I have yet to see any compelling evidence that past stock prices can be used to predict future stock prices.”
“I would also steer clear of ‘hedge funds.'”
“If your expected investment period is only for a decade or less, no one can predict the returns you will receive with any degree of accuracy.”
“Switching your investment around in a futile attempt to time the market will only involve extra commissions for your broker, extra taxes for the government, and poorer net performance.”
“Dollar-cost averaging can reduce the risks of investing in stocks and bonds.”
The Random Walk Guide to InvestingBurton G. Malkiel
“A blindfolded chimpanzee throwing darts at the stock pages can select individual stocks as well as the experts.”
“The correct investment strategy is actually to throw a towel over the stock pages and buy a low-cost mutual fund that includes all stocks and does no trading.”
“By keeping your savings and investment strategy as simple as possible, you will free up the time to do the really important things your want to do in your life such as spending more time with friends and family.”
“Every investor needs a cash reserve cushion to meet the various emergencies of life that always seem to come up at the most inconvenient times.”
“As George Soros once said, if you are going ‘to be in the stock-market game, you have to endure the pain.'”
“Experience is the toughest kind of teacher–it give you the test first and the lesson afterwards. Perhaps, by learning a bit of history, you can assimilate the lesson vicariously without bearing the costs.”
“Adding real estate to a portfolio tends to reduce its overall volatility.”
“Higher investment returns can only be achieved by accepting greater risk.”
“The amount of capital you start with is not nearly as important as getting started early.”
“The secret of getting rich slowly (but surely) is the miracle of compound interest. — One dollar invested in stocks since 1802 would have accumulated to almost $7 million by the end of 2002.”
“Many studies have concluded that the major determinant (90%) of the overall rate of return earned by investors is not the particular bond or stock funds they buy, but rather the way they allocate their investment funds among the various asset classes.”
“The correct response to a fall in the price of one asset class is not to panic and sell out. Rather, you need the discipline and the fortitude to buy more.”
“Don’t be trigger-happy. But rebalance at least once a year.”
“The only factor reliably linked to future mutual fund performance is the expense ratio charged by the fund.”
Rational Investing in Irrational TimesLarry E. Swedroe
Covers investing mistakes (by title of chapter):
1. Are you overconfident of your skills? 2. Do you project recent trends indefinitely into the future? 3. Do you believe events are more predictable after the fact than before? 4. Do you extrapolate from small sa mples and trust your intuition? 5. Do you let your ego dominate the decision-making process? 6. Do you allow yourself to be influenced by a herd mentality? 7. Do you confuse skill and luck? 8. Do you avoid passive investing because you sense a loss of control? 9. Do you avoid admitting your investment mistakes? 10. Do you let the price paid affect your decision to continue to hold an asset? 11. Are you subject to the fallacy of the “hot streak”? 12. Do you confuse the familiar with the safe? 13. Do you believe you are playing with the house’s money? 14. Do you confuse information with knowledge? 15. Do you believe your fortune is in the stars? 16. Do you rely on misleading information? 17. Do you only consider the operating expense ratio when selecting a mutual fund? 18. Do you fail to consider the costs of an investment strategy? 19. Do you confuse great companies with great (high-return) investments? 20. Do you understand how the price paid affects returns? 21. Do you believe that more heads are better than one? 22. Do you believe active managers will protect you from bear markets? 23. Do you fail to compare your funds to proper benchmarks? 24. Do you focus on pretax returns? 25. Do you rely on a fund’s descriptive name when making purchase decisions? 26. Do you believe active management is a winner’s game in inefficient markets? 27. Do you believe hedge fund managers deliver superior performance? 28. Do you treat the highly likely as certain and the highly unlikely as impossible? 29. Do you confuse before-the-fact strategy and after-the-fact outcome? 30. Do you try to succeed even when success is highly unlikely? 31. Do you fail to understand the importance of saving early in life? 32. Do you fail to evaluate the real cost of an expenditure? 33. Do you believe diversification is the right strategy only if the horizon is long? 34. Do you believe that this time it’s different? 35. Do you fail to tax-manage your portfolio throughout the year? 36. Do you let taxes dominate your decisions? 37. Do you confuse speculating with investing? 38. Do you try to time the market? 39. Do you rely on market gurus? 40. Do you use margin to boost investment returns? 41. Do you work with commissioned advisors? 42. Do you spend too much time managing your portfolio? 43. Did you begin your investment journey with a road map? 44. Do you have too many eggs in one basket? 45. Do you underestimate the number of stocks needed to build a diversified portfolio? 46. Do you believe diversification is determined by the number of securities held? 47. Do you confuse indexing with the exclusive use of an S&P 500 fund? 48. Do you consider your home as your exposure to real estate? 49. Do you use long-tem bonds or bond funds for your fixed income allocation? 50. Do you purchase products meant to be sold, not bought? 51. Do you chase the IPO dream? 52. Is your withdrawal assumption rate in retirement too aggressive?
To be continued here.