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Comment by gydfi | Hacker News Reader

Index funds seem to be emerging as a new religion on the comment sections of the internet. As religions go it's reasonably harmless, but the faith that some folks have in index funds vs sensibly diversified portfolios of decent self-selected stocks is disarming.

A reasonably chosen self-selected buy-and-hold portfolio will, on average, perform just about as well as an index fund. Psychologically it can be better or worse depending on your personality because you get/have to take responsibility for your profit/loss.

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> on average

I think the goal of an index fund is to normalize results, so that you don't happen to be the guy who ends up significantly below average.

But that means you're not going to end up significantly above average either. Whether that makes sense really depends on your financial situation and tolerance for risk than any hard and fast rule.

But it seems that most people don't really beat the index funds so the expected returns are essentially the same as index funds. Without higher returns why would you take higher risk?

Your returns are potentially higher. And lower.

Let's say I want to take an Alaskan cruise, but I don't quite have the money. If I get a higher return I'll have enough to go. If I get a lower return I won't go, and I'll still have enough money for rent. In my (admittedly contrived) scenario I'm willing to accept more risk as long as my returns are potentially higher.

It's risk-adjusted return that you and the GP care about. It's fairly straightforward to add both risk and return - just add leverage. Picking individual stocks, on the other hand, means you wind up being the "dumb money" that the "smart money" systematically takes advantage of.

I don't think it's that hard to beat the "smart money" provided you don't try to out-trade them.

Buying and holding low-cost index funds is one way to beat the "smart money."

The way that you manipulate this is by adjusting your risk profile. If you want potentially higher returns, you accept more risk. If you want predictability, you accept lower returns.

Self-selecting a bunch of stocks increases your risk profile compared to using an index fund of the whole stock market, but you incur significantly more trading costs as a result. If you want to increase your possible returns at greater risks, there are cheaper ways of doing it.

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