2. Only invest in the winners.
I look at the funds available that is doing well. Then you simply pick one of those. If any of them has a low expense ratio, I pick that one, of course. I try to stay in funds with an expens ration below 0.7%. Should a fund drop down the list of top performers replace it with another among the top 5.
Source: Investor gets more in retirement than from working
Huh? How would anyone ever make money with this approach? By definition, he is buying when prices are high and selling when they are low, in exchange for more expensive stocks.
He's basically following a momentum strategy--which can work well as long as the market is strong. We've had an usually long bull market so it is possible he's done well. The danger with momentum strategies is if the market goes down or even sideways you can blow your fingers off.
This.
I think the ongoing dispute here about whether he's picking future losers is only tangentially addressing the critical point: he's not just choosing average stock funds, he's choosing specific market sectors. I am assuming that his retirement plan will have one or two funds within a number of specific sectors, so maybe an aggressive growth fund, a dividend-focused fund, a value fund, a bond fund, something that invests in commodities, something that invests in REITs, etc. etc. etc. So assume he starts with an equal weighting, and then the next year value funds suck and growth funds are taking off. So he sells the value funds (low) and buys more of the growth funds (high). Then the next year, he picks the biggest losing sector, sells it (low), and buys the biggest winner (high). Rinse, repeat. Classic momentum investing.
The think about momentum investing is that
it can usually work for several years -- IIRC from a few years ago, when you are at the beginning of a market rally, buying the top-performing sector (aggressive growth funds) will make you significant money for 2-3 years before it falls out of favor. Couple that with, in this guy's case, one of the longest-running bull markets in history, and I'd be surprised if he
hadn't made a buttload of money.
The problem, of course, is that eventually even the most raging bull market ends. It may end creakingly slowly, or it may end in the blink of an eye.* And unless you are a massively sophisticated investor (and, honestly, even if you are), you will have
no clue when that is going to happen. So how do you know when you should toss those aggressive growth funds and put your money in other asset classes/types of funds? Based on history, the answer given by people like this guy is "after stocks have cratered and my portfolio is worth half its former value."**
So I agree completely that this guy is setting himself up for future underperformance. To my mind, though, this is
consistent with the law of averages/regression to the mean, not
because of it.*** We know from the past 100+ years of experience that markets are cyclical, because the economies that provide the basis for those markets are cyclical. The booming economies that lead to bull markets are inevitably replaced with recessions that lead to bear markets, until the economy starts to perk up again and the market swings. As a result, we can predict, with a high degree of certainty, that a strategy that maximizes your returns during bull markets will very likely fuck you over completely during bear markets.
*Hint: the greater the rise, usually the more sudden and dramatic the fall.
**Added bonus here that this guy doesn't even realize that he is following a specific and well-known investment strategy -- he just thinks he's got this whole "investing" thing nailed. And since he doesn't even know that he is following a strategy, he has no clue about that strategy's limitations (i.e., that it works only in a bull market). So unlike those sophisticated momentum players, this guy won't even be looking for signs of a pending bear market to signal that he needs to ditch that approach for a different one; he'll just continue blithely on, content in his belief that he's smarter than the average bear.
***IMO, the law of averages/regression to the mean would apply if you were focusing on performance within a specific subcategory of the market, where performance is determined based on stock-picking prowess instead of which sector of the market is hotter or colder. The guy who "wins" that competition for the first couple of years is not likely to be the winner in later years, because very very few people can pick winners and accurately predict the future consistently over a period of several years.