Author Topic: My Problem with Systematic Index Investing  (Read 8247 times)

Auckland Stubble

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My Problem with Systematic Index Investing
« on: February 10, 2016, 02:13:32 PM »
The general consensus amongst Mustachians is to simply invest a fixed amount into an index fund every paycheck regardless of the price of the overall stock market.

I have two issues with this:

- I feel uncomfortable buying something if I know it is overvalued. I like buying things cheaply and investments are one of those things.

- I look through indexes that follow markets and a large proportion of what the fund invests into are companies that I would never personally invest in, so why should I put a certain percentage of my net worth into those companies just because they make up a certain percentage of the index?

I see the benefits of just set and forget, but I feel uneasy about buying companies that I don't think have a bright future and also overpaying for them.

Thoughts?

Guses

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Re: My Problem with Systematic Index Investing
« Reply #1 on: February 10, 2016, 02:25:02 PM »
The thing with picking individual stocks is that you can do better than investing in an index. The other thing is that you can do much, much worse!

Unless you have a gift for only picking winning stocks, buying a little bit of everything is a much safer bet if you believe that the future is bright. It will get you to your destination.

If you don't believe that the future is going to be bright, stocks might not be the way to go.

Eric

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Re: My Problem with Systematic Index Investing
« Reply #2 on: February 10, 2016, 05:14:45 PM »
If it were easy to just simply pick the good stocks and avoid the bad stocks, then there'd be no need to index.  But it's not really that simple.  Consider everyone's current darling Apple.  Who in their right mind would've wanted to purchase APPL in 2004?  That thing had been a dog for 25 years!  Whoops! 

If you have a reliable way to identify the good companies and avoid the bad, then have at it.  The main issue being that almost no one does.  Plus you end up battling survivorship bias.  You're only going to read about the successes because no one wants to broadcast how they underpeformed the market for the last 10 years.

I'd also ask the question of how you know something is overvalued.  A simple ratio?  Gut feeling?  What if you're wrong?  Is it worth the risk of sitting on the sidelines for years?  Just search through some threads around here from 2012 when people were sure that the market was overvalued.  I bet they didn't have as happy a 2013 as I did!

BarkyardBQ

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Re: My Problem with Systematic Index Investing
« Reply #3 on: February 10, 2016, 05:38:00 PM »
For a lot of people the risk/reward is safer and FI is easier to predict with the average return of index investing, vs one where you could lose progress or everything to individual stock picking. I can ride out a down market, but I can't stomach putting my families financial security on the wrong bet. It don't really care what I invest in, if you can show me data where an investment constantly goes up 5-8% a year on average over multiple decades/lifetimes I'm going to pick it, it's safe... for now that's index investing. Saying it's currently expensive the day you buy it fails to account for it being worth more in the future when you will want to make withdrawals. The market is is always at it's highest, until it's not, then it will go higher.

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #4 on: February 10, 2016, 05:38:28 PM »
There are times when the stock market has been overvalued, and it then continued to have high returns for many years. The stock market has a lot more good years than bad years. The reason to buy all companies, is because people don't know how to pick what companies will do well, or what companies will do poorly. If someone could successfully pick companies that will do good, he would be able to just buy stocks of them. If someone could successfully pick companies that will do bad, he could just buy shorts of them. Many people think they are able to do this and lose a lot of money.

http://jlcollinsnh.com/2012/04/25/stocks-part-iii-most-people-lose-money-in-the-market/

Keith123

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Re: My Problem with Systematic Index Investing
« Reply #5 on: February 10, 2016, 07:01:31 PM »
The general consensus amongst Mustachians is to simply invest a fixed amount into an index fund every paycheck regardless of the price of the overall stock market.

I have two issues with this:

- I feel uncomfortable buying something if I know it is overvalued. I like buying things cheaply and investments are one of those things.

- I look through indexes that follow markets and a large proportion of what the fund invests into are companies that I would never personally invest in, so why should I put a certain percentage of my net worth into those companies just because they make up a certain percentage of the index?

I see the benefits of just set and forget, but I feel uneasy about buying companies that I don't think have a bright future and also overpaying for them.

Thoughts?

I feel the same.  You need to read this:  http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.  It's a talk by Warren Buffett in Novermber 1999, right before the crash.

seattlecyclone

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Re: My Problem with Systematic Index Investing
« Reply #6 on: February 10, 2016, 08:12:28 PM »
I think it's reasonable to believe the stock market is overvalued right now and still invest in it. You're making an investment for the long term. Maybe you think stocks are trading above today's "true value" (however you want to measure that), but do you think they're trading above what the true value will be in 2020? 2030? 2040? There's no guarantee the price will go down before it goes up to that higher, future value. I'd rather take the risk of a short-term downturn instead of having my money sitting on the sidelines waiting for a crash that may never come.

MustacheAndaHalf

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Re: My Problem with Systematic Index Investing
« Reply #7 on: February 10, 2016, 08:30:38 PM »
- I feel uncomfortable buying something if I know it is overvalued. I like buying things cheaply and investments are one of those things.
What if the market has nothing comfortable for you?  People who invest only in certificates of deposit won't pull ahead of inflation very far, if at all.  There isn't enough risk and reward involved, but stocks seems to have that higher risk and reward.

You might look into value investing or indexing with a value tilt - either of those might give perspective one way or the other about index funds.  I'm partial to Larry Swedroe's books, and he emphesizes small/value type index investing in "The Only Guide to a Winning Investment Strategy You'll Ever Need".  You might see if you're more partial to the combination of investing and a value tilt.  (Also available at libraries)
http://www.amazon.com/Guide-Winning-Investment-Strategy-Youll/dp/0312339879
« Last Edit: February 10, 2016, 08:40:43 PM by MustacheAndaHalf »

Kaspian

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Re: My Problem with Systematic Index Investing
« Reply #8 on: February 10, 2016, 11:29:13 PM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?  Of at least have the mods merge them all together into one tinfoil hat club?

- I feel uncomfortable buying something if I know it is overvalued. I like buying things cheaply and investments are one of those things.

My thought:  Just because you think the general market is overvalued doesn't mean it is.  You "know it"?  That doesn't make it true.

I feel uneasy about buying companies that I don't think have a bright future and also overpaying for them.

My thought:  Again, you can't possible know what people are overpaying for (unless it's a Facebook IPO.)  Also, "feelings" are about as useful in investing as a bike with tits.

mrpercentage

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Re: My Problem with Systematic Index Investing
« Reply #9 on: February 11, 2016, 01:33:44 AM »
It just might be overvalued. I think there is a lot of cash parked on the sidelines because its not sure where to go. The companies that look undervalued "might go under" and the companies that you have confidence in have PE's of 20+

Couple of thoughts.

First that those managers will eventually have enough cash parked on the side that they will have to invest, and when they do it will start a domino rush of buying because no one will want to miss that rally. I have no idea when this will happen but the pressure is building. I received the booklet from a mutual fund I have saying "we have a larger position of cash because of ____, ____, and looking for opportunities. I think there might be hundreds of billions parked on the side waiting to come in. Unless panic selling starts.

The thing that might start this is panic selling is some systematic failure like Euro banks. In that case all the cash on the side will most likely go to redemptions.

Kids pick a phone first, then a car (even before their financial wellbeing) then all else

Yet Apple is cheap despite the numbers. Google rides with the rest of Fang including down when it shouldn't. Ford and GM are dirt cheap because a bunch of managers got burned in 08-09 and they think it all might go down despite the numbers they present.

So you don't want to drop it all in but you don't want to miss your chance, and yes things are dangerous. There is a rant for you

faramund

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Re: My Problem with Systematic Index Investing
« Reply #10 on: February 11, 2016, 02:14:26 AM »
Why not put say 10% of your money in an index, 10% into whatever you think is a good idea, and 80% into something safe. In 3 months/6months/1 year, see what's grown the most, and shift a bit of money in it.. Repeat.

All the research seems to say that indexing beats most things, but if you doubt it, try something else, but make sure you measure it.

Also, I assume you're in NZ, which probably has an even more concentrated market than where I am in Australia. I don't like to buy the Australian index because 60% of it is basically a couple of resource companies and a bunch of banks, so I get what you mean.

Can you put money into some international indexes - it'd get you a lot more diversity. So, as above, but with some extra indexes thrown in.

You could also do equal weight indexing - but you've probably got to do it yourself. Pick the biggest 10 companies, and apply the same amount of money into each of them, or choose the biggest 20 companies, and pick the 10 with the lowest PE (or the highest dividend), and invest the same amount of money in each of them (this has a similar spirit to what I do, and as far as I can tell, I beat the market).

Whatever you do, if you're not just buying an index - you have to be able to do a comparison in a year (or whatevers) time - and be able to see if what you did was really better than an index.

protostache

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Re: My Problem with Systematic Index Investing
« Reply #11 on: February 11, 2016, 07:21:02 AM »
You could also do equal weight indexing - but you've probably got to do it yourself. Pick the biggest 10 companies, and apply the same amount of money into each of them, or choose the biggest 20 companies, and pick the 10 with the lowest PE (or the highest dividend), and invest the same amount of money in each of them (this has a similar spirit to what I do, and as far as I can tell, I beat the market).

This is what I've been doing with half of my family's portfolio since November and it's been relatively successful. I sold a big chunk of our VTSAX and split it into about 20 non-tech blue chip positions, all equal weight. Every month I have an equal amount of money and I put it into whatever one of those companies looks good at the time, sometimes opening a new position from my wishlist if they're sufficiently attractive. For example, today I'm planning on buying Disney because people went crazy over the stupid 6% loss from ESPN and completely ignored the 86% gain from Star Wars, which will continue to build on itself as more movies and theme parks come online.

The other half of our investable money stays in broad indexes like VTSAX and FSTVX, so I feel like I'm covered either way. Tilting toward large non-tech blue chips helps me sleep at night :)

babystache89

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Re: My Problem with Systematic Index Investing
« Reply #12 on: February 11, 2016, 08:41:03 AM »
As a general rule of thumb, I don't dump money into index funds when the Shiller P/E is above 22, and really can't think of any convincing reason to do so.  Historically, what must go up must come down. 
Source: http://www.gurufocus.com/shiller-PE.php

In the meantime, I invest less than I normally would in stocks I think are fairly valued and have better growth potential, and put the rest in a high interest online bank account waiting for the next good buying opportunity (which is inevitable).  I think people on this forum tend to be slightly irrational/ group-thinky...

« Last Edit: February 11, 2016, 08:49:01 AM by babystache89 »

Woody Viet

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Re: My Problem with Systematic Index Investing
« Reply #13 on: February 11, 2016, 09:16:43 AM »
I think it's useful to draw a distinction between passive investing and index investing.

At it's heart passive investing is about identifying assets you are comfortable with holding for a very long time period and then sticking with them through the whole variety of market conditions that will occur. This approach when executed properly results in low fees, reasonable returns and fewer investor mistakes. It's a philosophy of how to act in an investment environment rather than what to buy.

The indexing approach then builds on this by saying that in the long run buying the market index is guaranteed to give you average performance. To the average layman without huge resources and skill to devote to investing it's very difficult to identify assets with superior 'risk adjusted returns,' so you might as well take all of the benefits of a passive approach and combine it with maximum diversification by owning a fund which simple buys the whole market.

As you've mentioned this can feel uncomfortable for two reasons: either the market is seen as expensive or some of the assets within the market are seen as expensive. Myself I am a value investor but not an index investor for both of these reasons. I hate feeling like I'm overpaying for assets. For this reason I only buy stocks which both seem cheap (bottom 20% of companies by P/B, P/E, CAPE), have highly profitable underlying businesses (top 20% of companies by Operating Profit/Assets), are shareholder friendly (high payout ratios), and are small (within the bottom 10% of total market cap).

It's important to note that many of the strongest results against active management are based on two very strong assumptions. Firstly, their alphas are calculated using regressions based on some or all of the factors mentioned above. Secondly their returns are then scaled by volatility. What does this mean in plain English? Well it means you can expect to increase your returns by 'tilting' towards these factors. This is exactly what I have done above. I don't buy 'expensive' companies because I don't feel confident in the fact that I will hold them through thick and thin. They give me an uneasy feeling through what I perceive as a low margin of safety.

It's important to note that the returns of these tilts may not work again in the future. The modern market might not reward you for buying the cheaper than average companies, or the small ones, or the more profitable ones. This is a very big debate in itself.

You are also losing a bit of diversification when you move away from the index. How much is up to debate. I personally think not much, others will probably strongly disagree with me. I read recently that stocks which have been on the market or less than 1, 3, 5 and even 10 years under-perform their more grizzled peers. I can dig that out if anyone is interested. This is why I think index rebalancing is less efficient that doing it yourself.

What I've attempted to show is that it can be perfectly rational in an efficient market to be something other than an index investor. Index investing though is still pretty awesome as it is so simple and easy. It let's you get on with the rest of your life! If you are interested in more check out this post by Joshua Kennon

http://www.joshuakennon.com/mail-bag-buying-stock-when-valuations-are-high/
« Last Edit: February 11, 2016, 09:19:22 AM by Woody Viet »

Retire-Canada

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Re: My Problem with Systematic Index Investing
« Reply #14 on: February 11, 2016, 09:41:17 AM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?

I was thinking the same thing. I mean if a multiple threads on the same topic are on the first page of this forum why the fuck are you starting another one????

Kaspian

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Re: My Problem with Systematic Index Investing
« Reply #15 on: February 11, 2016, 09:54:38 AM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?

I was thinking the same thing. I mean if a multiple threads on the same topic are on the first page of this forum why the fuck are you starting another one????

Current flavor-of-the-month, I guess?  Last year around now it was, "I'm going 100% equity in one fund with no diversification--please try and convince me otherwise but be aware I've already made up my mind so everything you say is wasting your breath."  Ersh... That was fun.  About 15 threads in a row of basically, "please spend time talking to my wall, you idiots."  ...About as futile as trying to scold a cat.  Is it about baiting?

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #16 on: February 11, 2016, 10:31:09 AM »
I think it's useful to draw a distinction between passive investing and index investing.

At it's heart passive investing is about identifying assets you are comfortable with holding for a very long time period and then sticking with them through the whole variety of market conditions that will occur. This approach when executed properly results in low fees, reasonable returns and fewer investor mistakes. It's a philosophy of how to act in an investment environment rather than what to buy.

The indexing approach then builds on this by saying that in the long run buying the market index is guaranteed to give you average performance. To the average layman without huge resources and skill to devote to investing it's very difficult to identify assets with superior 'risk adjusted returns,' so you might as well take all of the benefits of a passive approach and combine it with maximum diversification by owning a fund which simple buys the whole market.

As you've mentioned this can feel uncomfortable for two reasons: either the market is seen as expensive or some of the assets within the market are seen as expensive. Myself I am a value investor but not an index investor for both of these reasons. I hate feeling like I'm overpaying for assets. For this reason I only buy stocks which both seem cheap (bottom 20% of companies by P/B, P/E, CAPE), have highly profitable underlying businesses (top 20% of companies by Operating Profit/Assets), are shareholder friendly (high payout ratios), and are small (within the bottom 10% of total market cap).

It's important to note that many of the strongest results against active management are based on two very strong assumptions. Firstly, their alphas are calculated using regressions based on some or all of the factors mentioned above. Secondly their returns are then scaled by volatility. What does this mean in plain English? Well it means you can expect to increase your returns by 'tilting' towards these factors. This is exactly what I have done above. I don't buy 'expensive' companies because I don't feel confident in the fact that I will hold them through thick and thin. They give me an uneasy feeling through what I perceive as a low margin of safety.

It's important to note that the returns of these tilts may not work again in the future. The modern market might not reward you for buying the cheaper than average companies, or the small ones, or the more profitable ones. This is a very big debate in itself.

You are also losing a bit of diversification when you move away from the index. How much is up to debate. I personally think not much, others will probably strongly disagree with me. I read recently that stocks which have been on the market or less than 1, 3, 5 and even 10 years under-perform their more grizzled peers. I can dig that out if anyone is interested. This is why I think index rebalancing is less efficient that doing it yourself.

What I've attempted to show is that it can be perfectly rational in an efficient market to be something other than an index investor. Index investing though is still pretty awesome as it is so simple and easy. It let's you get on with the rest of your life! If you are interested in more check out this post by Joshua Kennon

http://www.joshuakennon.com/mail-bag-buying-stock-when-valuations-are-high/
index investing is buying a fund that follows an index like the S&P 500, you don't have to give a shit about what the total market does, you can get a REIT index fund, a value index fund, etc.
passive index investing is buying an index fund and using it to generate passive income
I'd say a bigger reason that people don't like actively managed funds are huge expense ratios, the next reason being that people can't time the market, and usually do worse than the market
« Last Edit: February 11, 2016, 10:33:32 AM by Jeremy E. »

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #17 on: February 11, 2016, 10:34:06 AM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?  Of at least have the mods merge them all together into one tinfoil hat club?

- I feel uncomfortable buying something if I know it is overvalued. I like buying things cheaply and investments are one of those things.

My thought:  Just because you think the general market is overvalued doesn't mean it is.  You "know it"?  That doesn't make it true.

I feel uneasy about buying companies that I don't think have a bright future and also overpaying for them.

My thought:  Again, you can't possible know what people are overpaying for (unless it's a Facebook IPO.)  Also, "feelings" are about as useful in investing as a bike with tits.
+1

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #18 on: February 11, 2016, 10:36:26 AM »
As a general rule of thumb, I don't dump money into index funds when the Shiller P/E is above 22, and really can't think of any convincing reason to do so.  Historically, what must go up must come down. 
Source: http://www.gurufocus.com/shiller-PE.php

In the meantime, I invest less than I normally would in stocks I think are fairly valued and have better growth potential, and put the rest in a high interest online bank account waiting for the next good buying opportunity (which is inevitable).  I think people on this forum tend to be slightly irrational/ group-thinky...
in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.
« Last Edit: February 11, 2016, 10:38:26 AM by Jeremy E. »

Telecaster

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Re: My Problem with Systematic Index Investing
« Reply #19 on: February 11, 2016, 10:57:22 AM »

in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.

^ This.  The thing that drives me batty about these "market is overvalued" discussions is that it does not follow that because the market is highly valued, one will then lose money. 

If the market is of above average value, it does follow that one can expect below average returns going forward for a period of time.

Newsflash!   The market performs below its historical average part of the time....by definition.   


BBub

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Re: My Problem with Systematic Index Investing
« Reply #20 on: February 11, 2016, 11:18:06 AM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?

I was thinking the same thing. I mean if a multiple threads on the same topic are on the first page of this forum why the fuck are you starting another one????

Current flavor-of-the-month, I guess?  Last year around now it was, "I'm going 100% equity in one fund with no diversification--please try and convince me otherwise but be aware I've already made up my mind so everything you say is wasting your breath."  Ersh... That was fun.  About 15 threads in a row of basically, "please spend time talking to my wall, you idiots."  ...About as futile as trying to scold a cat.  Is it about baiting?

LOL.  I'd like to know where all of our resident valuation specialists have been hiding until now.  I really could have used their overvaluation advice about 8 months ago.

babystache89

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Re: My Problem with Systematic Index Investing
« Reply #21 on: February 11, 2016, 11:48:11 AM »

in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.

^ This.  The thing that drives me batty about these "market is overvalued" discussions is that it does not follow that because the market is highly valued, one will then lose money. 

If the market is of above average value, it does follow that one can expect below average returns going forward for a period of time.

Newsflash!   The market performs below its historical average part of the time....by definition.

I never said I sold any of my positions (I'm a buy and holder). I'm just saying I wouldn't *buy* overvalued index funds.  So no, I wouldn't miss those 7 years of returns.  I would just wait to pour more money into index funds once things got reasonable again after a sharp correction.  Right now, I think the S&P 500 still has a ways to fall, so I'm mostly investing in reasonably valued individual Canadian companies I like.
« Last Edit: February 11, 2016, 11:51:45 AM by babystache89 »

Eric

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Re: My Problem with Systematic Index Investing
« Reply #22 on: February 11, 2016, 12:01:43 PM »

in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.

^ This.  The thing that drives me batty about these "market is overvalued" discussions is that it does not follow that because the market is highly valued, one will then lose money. 

If the market is of above average value, it does follow that one can expect below average returns going forward for a period of time.

Newsflash!   The market performs below its historical average part of the time....by definition.

I never said I sold any of my positions (I'm a buy and holder). I'm just saying I wouldn't *buy* overvalued index funds.  So no, I wouldn't miss those 7 years of returns.  I would just wait to pour more money into index funds once things got reasonable again after a sharp correction.  Right now, I think the S&P 500 still has a ways to fall, so I'm mostly investing in reasonably valued individual Canadian companies I like.

So you'd only miss out on some of the returns?  I'm not sure I'd be proud of that.  Although it's nice to see someone finally step up and admit that they underperform the market.

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #23 on: February 11, 2016, 12:14:39 PM »

in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.

^ This.  The thing that drives me batty about these "market is overvalued" discussions is that it does not follow that because the market is highly valued, one will then lose money. 

If the market is of above average value, it does follow that one can expect below average returns going forward for a period of time.

Newsflash!   The market performs below its historical average part of the time....by definition.

I never said I sold any of my positions (I'm a buy and holder). I'm just saying I wouldn't *buy* overvalued index funds.  So no, I wouldn't miss those 7 years of returns.  I would just wait to pour more money into index funds once things got reasonable again after a sharp correction.  Right now, I think the S&P 500 still has a ways to fall, so I'm mostly investing in reasonably valued individual Canadian companies I like.
the problem with that is that pretty much everything you just said is market timing, a fools game in which most people lose. You don't know if the index funds are overvalued, you don't know how far the S&P 500 will fall, you probably can't pick canadian companies that will do as well as the market(as statistics show most people can't), it's also a lot riskier to invest in individual companies(regardless of whether or not they are only a portion of your portfolio). And yes, you would miss potential returns from those 7 years that the funds you didn't buy would of gotten. If you keep waiting to jump in until a correction, you can miss a lot of good returns. Many people that wait to jump in will realize they've made a mistake after a while and jump in before the correction hits anyhow. You can invest however you choose, but I will debate against market timing every time I see or hear it mentioned.

babystache89

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Re: My Problem with Systematic Index Investing
« Reply #24 on: February 11, 2016, 12:20:14 PM »

in 1993 the Shiller CAPE went above 22, if you ducked out then you'd be laughed at, you would of missed 7 years of the best returns ever. Yes the market collapsed in 2000, but not nearly to 1993 levels.

^ This.  The thing that drives me batty about these "market is overvalued" discussions is that it does not follow that because the market is highly valued, one will then lose money. 

If the market is of above average value, it does follow that one can expect below average returns going forward for a period of time.

Newsflash!   The market performs below its historical average part of the time....by definition.

I never said I sold any of my positions (I'm a buy and holder). I'm just saying I wouldn't *buy* overvalued index funds.  So no, I wouldn't miss those 7 years of returns.  I would just wait to pour more money into index funds once things got reasonable again after a sharp correction.  Right now, I think the S&P 500 still has a ways to fall, so I'm mostly investing in reasonably valued individual Canadian companies I like.

So you'd only miss out on some of the returns?  I'm not sure I'd be proud of that.  Although it's nice to see someone finally step up and admit that they underperform the market.

You can invest however you want, but since I've started investing (5 years ago) I've outperformed VTI, so I'm going to stick with what works for me.  I also think it's important to note that as index funds have become more popular, the stocks within them have become more overvalued relative to stocks outside of them.  That seems a bit risky to me.  See http://www.nytimes.com/2015/10/11/business/mutfund/the-ease-of-index-funds-comes-with-risk.html?_r=0
« Last Edit: February 11, 2016, 01:43:46 PM by babystache89 »

HeadedWest2029

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Re: My Problem with Systematic Index Investing
« Reply #25 on: February 11, 2016, 12:23:59 PM »
I'd agree that stocks are somewhat "overvalued", but even attaching these types of terms is guesswork at best.  For instance, we are in a period of very low inflation, which historically produce higher trailing P/E and Shiller P/E ratios for the market as a whole. See http://www.fortunefinancialadvisors.com/blog/some-comments-on-current-valuations
Right now we're rocking a .73% inflation rate http://www.multpl.com/inflation/
Based on inflation, we would expect a CAPE P/E of 22.32, we are at 23
We would also expect a trailing P/E of 21.08, we are at 20.
So really a coin toss when you factor in inflation if we are overvalued right now.  Don't get me wrong, I'll still use CAPE as a loose predictor of future returns before pulling the plug, but with a heavy dose of humility in predicting the future.
Other reading if interested:

Dilution, Index Evolution, and the Shiller CAPE: Anatomy of a Post-Crisis Value Trap - http://www.philosophicaleconomics.com/2014/11/dilution-index-evolution-and-the-shiller-cape-anatomy-of-a-post-crisis-value-trap/

Leaving CAPE town - http://thereformedbroker.com/2014/01/12/leaving-cape-town/

hoping2retire35

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Re: My Problem with Systematic Index Investing
« Reply #26 on: February 11, 2016, 12:30:28 PM »
just buy oil, it is cheap now. it will go up at some point. even if it takes 10 years to double again and we have really high inflation like 5-6% you would still be ok...

But it could triple in two years so you might get rich.

babystache89

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Re: My Problem with Systematic Index Investing
« Reply #27 on: February 11, 2016, 12:36:23 PM »
just buy oil, it is cheap now. it will go up at some point. even if it takes 10 years to double again and we have really high inflation like 5-6% you would still be ok...

But it could triple in two years so you might get rich.

I'd rather bet on solar, which is also cheap bc the market irrationally ties it to the price of oil (solar generates electric power - it's not a petroleum substitute). And solar has greater growth potential obviously.

Jeremy E.

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Re: My Problem with Systematic Index Investing
« Reply #28 on: February 11, 2016, 12:42:23 PM »
just buy oil, it is cheap now. it will go up at some point. even if it takes 10 years to double again and we have really high inflation like 5-6% you would still be ok...

But it could triple in two years so you might get rich.

I'd rather bet on solar, which is also cheap bc the market irrationally ties it to the price of oil (solar generates electric power - it's not a petroleum substitute). And solar has greater growth potential obviously.
Betting on solar right now, is also betting on a democrat. If a democrat wins, the price of solar stocks will go up, if a republican wins, the opposite will occur

babystache89

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Re: My Problem with Systematic Index Investing
« Reply #29 on: February 11, 2016, 12:44:20 PM »
just buy oil, it is cheap now. it will go up at some point. even if it takes 10 years to double again and we have really high inflation like 5-6% you would still be ok...

But it could triple in two years so you might get rich.

I'd rather bet on solar, which is also cheap bc the market irrationally ties it to the price of oil (solar generates electric power - it's not a petroleum substitute). And solar has greater growth potential obviously.
Betting on solar right now, is also betting on a democrat. If a democrat wins, the price of solar stocks will go up, if a republican wins, the opposite will occur

I'd put my money on a Democrat winning. Besides, plenty of other countries (Australia, Japan, China, etc) are investing in solar pretty heavily.

Telecaster

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Re: My Problem with Systematic Index Investing
« Reply #30 on: February 11, 2016, 02:54:00 PM »

You can invest however you want, but since I've started investing (5 years ago)...

That's exactly the problem.  Your strategy, as described by you,  would have underperformed if you started back in 1993. 

So if you know for certain your strategy would have failed in the past, why are you so certain it will succeed in the future?   

You're right, it is your money. But I suggest simply lighting it on fire might bring you more enjoyment. 



NoraLenderbee

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Re: My Problem with Systematic Index Investing
« Reply #31 on: February 11, 2016, 02:54:15 PM »
Oh my fuck--can we please stop with the "everything's overvalued" threads?

I was thinking the same thing. I mean if a multiple threads on the same topic are on the first page of this forum why the fuck are you starting another one????

Current flavor-of-the-month, I guess?  Last year around now it was, "I'm going 100% equity in one fund with no diversification--please try and convince me otherwise but be aware I've already made up my mind so everything you say is wasting your breath." 


Which is better, paying off the mortgage or investing?
Which is better, real estate or stocks?
Nobody can time the market! Except me
Buy oil! Sell oil!
Dividend investing is stupid because dividends are MATHEMATICALLY EQUAL to capital gains
You're all suckers because I'm making 50% in Greek bonds

Eric

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Re: My Problem with Systematic Index Investing
« Reply #32 on: February 11, 2016, 03:48:41 PM »
You're all suckers because I'm making 50% in Greek bonds

Old Pro  :)

BBub

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Re: My Problem with Systematic Index Investing
« Reply #33 on: February 11, 2016, 04:01:49 PM »
You're all suckers because I'm making 50% in Greek bonds

Old Pro  :)

Erick, you can send that 4% rule back to the hucksters who sold you that crap & forget about it Erric.  Erik, the real money is in classic cars.  Never question me Errik, I've been retired longer than you've been alive.

Eric

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Re: My Problem with Systematic Index Investing
« Reply #34 on: February 11, 2016, 04:18:42 PM »
You're all suckers because I'm making 50% in Greek bonds

Old Pro  :)

Erick, you can send that 4% rule back to the hucksters who sold you that crap & forget about it Erric.  Erik, the real money is in classic cars.  Never question me Errik, I've been retired longer than you've been alive.

Dude, you're going to get me in trouble here.  I can't stop laughing!