How many people really buy and hold and don't question their strategy when the 30%+ drawdowns come? We know sticking to your plan is key to long term success. Can the masses stick to simple buy and hold long term?
My experience (thankfully not paid for with real money, but fake trading) has shown me I am not good at market timing, particularly knowing when to get back in, so I don't bother trying.
It doesn't really take restraint so much as an acceptance that I will likely not do better than buy & hold. I don't enjoy seeing my balance go down, but I am not close to retirement, so I accept that I need to wait it out to catch market rallies because I am not paying super close attention to markets.
I recently learned about a class of investment strategies called tactical asset allocation. One aspect of TAA is to switch to some other asset when your main one isn't performing well.
It's a form of market timing but it's systematic and backtestable. Reallocating once a month, a lot like a rebalancing that even B&Hers probably do.
This site [0] has some interesting articles on their blog. HAA has really piqued my interest [1].
[0] https://allocatesmartly.com/what-we-do/#whatistaa [1] https://indexswingtrader.blogspot.com/2023/02/introducing-hy...
Lots of people saving for retirement do though.
If you go into a "situation" thinking you are already overleveraged or whatever, you are much more likely to do something silly vs. if you went into the same situation comfortable in the logic of how you have your finances configured.
Market downturns mean nothing! You lose literally nothing; you still own the same things you did in the morning, and will own those things again in 5 years (or more based on splits/dividends).
Honestly yeah, this is kind of a critical part of profitable investing; if you can’t hold through downturns, you ought to find someone who can and then forget about that money entirely.
In the case where I have to tap into my retirement account because of unlucky life circumstances, I'm happier that I'm selling something I bought for 100 at 75 vs having to sell it at 50 (hypothetically).
I cannot overstate how bad of an idea this is. Investing is not the same as decorating, there are objectively bad ways of managing your investments and this is one of them.
You will end up poorer as a result of this behavior. I hope that happiness is worth it, because you are paying through the nose.
I'll assume you're a proponent of B&H SPY and continuing to buy $X/month of SPY until you retire. I'm just saying there are other ideas than that that you can use that have smaller drawdowns and comfortable returns to risk. You could B&H 60/40 SPY/treasuries for example.
Is it active management if you rebalance 60/40 once a year? What if you rebalance quarterly? At what point is it active management and therefore bad?
- https://portfoliocharts.com/portfolios/ (one step up in activity from B&H one ETF forever)
- https://allocatesmartly.com/blog/ (another step up in activity from sticking to one asset allocation that you simply rebalance periodically)
- https://qoppac.blogspot.com/p/systematic-trading-start-here.... (several steps up in complexity and activity)
If pablum on the Internet is your preferred method of investing advice, by all means care about a blog. If understanding finance as it operates is your preference, I recommend staying far, far away from the Internet blogosphere.
Things aren't as settled as you make them out to be, and that's OK. What's important is that you have enough confidence in your methods, whatever they are, to stick with them. In the end, the stickwithitness may be more important than what you stick to.
The basics of investing are settled for individuals, and you are not operating at a level of sophistication to rise into the areas of finance that are debated.
These aren't "my" methods, they're the methods. You either do these basic things as a retail/individual, or you lose money. Period.
Instead of me assuming I know what you mean by the methods, would you mind stating what they are?
I think we could agree that some of them are:
* Have a sound plan (I'm sure we could debate what makes a plan sound)
* Stick to the plan
You ignore Nejat Seyhun's 1994 paper "Stock Market Extremes and Portfolio Performance" [0] which says:
> For the 1963-1993 time frame, the findings were similar. The index gained at an average annual rate of 11.83%, for a cumulative return on $1.00 of $23.30 over 31 years. If the best 90 trading days, or 1.2% of the 7,802 trading days, are set aside, the annual return tumbles to 3.28% and the cumulative gain falls to $1.10.
And from ARWDWS [1]:
> The past history of stock prices cannot be used to predict the future in any meaningful way. Technical strategies are usually amusing, often comforting, but of no real value.
Further:
> Using technical analysis for market timing is especially dangerous. Because there is a long-term uptrend in the stock market, it can be very risky to be in cash. An investor who frequently caries a large cash position to avoid periods of market decline is very likely to be out of the market during some periods where it rallies smartly.
[0] https://www.stayingrich.net/wp-content/uploads/2016/05/Towne...
[1] https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/03933...
Thank for for that paper, I'll give it a read.
The next line in Seyhun's paper is more interesting to me and the focus of my research and strategy:
> If the 10 worst days are eliminated, the annual return jumps to 14.06%, and the cumulative return increases to $44.80. With the 90 worst days out, the annual return rises to 21.72% and the cumulative gain to $325.40.
I believe this paper describes a strategy that accomplishes that goal relatively well: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4346906
Also uncited and unpublished papers aren’t worth the ink they’re printed on.
The paper you shared defines "in the market" as long equities and "out of the market" as long T-bills. The paper I linked looks at other assets you could rotate into besides T-bills. How could that one change (they offer several other ideas) impact the results of your paper?
If that's not interesting to you, skip the paper I linked.
Personally, I believe that type of research is still valuable. I don't structure my life just based on things in published and cited articles.
This isn't about interest, it's about value. What you're proposing is flat out wrong, and has been shown to be so in hundreds of different ways.
https://allocatesmartly.com/diving-deeper-does-the-day-of-th...
So based on this, I think you have a filter problem; you seem to be unable to accurately evaluate sources for their credibility, and take in any/all arguments without understanding how easy it is to be manipulated by un-credible sources into believing hard-to-disprove ideas that are nonetheless actively harmful to you and your ability to grow your investments.
This leaves you susceptible to charlatans and snake-oil salespeople, which fully explains your desire to believe proven-wrong ideas on investing. When you lose out on these market timing attempts, you apparently do so in a way that allows others to profit directly off of you, and you further advocate for others to follow suit.
You're a great mark, I'll give you that.
Your model/filter may be better because you don't have to think about as many things. There's certainly more information out there than one has the ability to ingest. In my experience many things I thought were settled turned out not to be upon further inspection. A simple filter might be good enough for your purposes!
I think your ideas about investing can be correct (in that they produce favorable outcomes) and other ideas can be correct too.
Not a perfect analogy, but Newton's ideas about gravity are correct to explain a lot of things. Einstein's ideas expand and explain more. They are both correct, depending on the level of detail you need. Sometimes "correct" roughly equals "useful".
Do you really not understand the issues there? Incredible.
And it is not a logical fallacy to disregard their argument entirely. I didn’t say they were wrong, I said they weren’t credible.
Thanks for the lively discussion, Zetice!
Knowing your limits and knowing how bias creeps in are two skills you clearly lack. I hope nobody depends on you to make these kinds of decisions for them or in a way that impacts them.
I'm pretty sure Zetice hasn't changed their mind on anything. I haven't really changed my mind on anything.
I still think the things we linked to are valuable. For those of you who have filters that let the information through, I hope you find something useful. Read the paper Zetice linked to and see what questions you come up with. Or don't.
You will be worse off if you think like they do.
My sarcasm didn't go through. I mean no one has written a published and cited paper about our conversation. Therefore no one should make any decisions based on our discussion.
I am stunned sometimes when I discover how completely unaware people are of how to apply critical thinking in the modern world. It's second nature to me, but conversations like these make it abundantly clear it's not a universal skill.
I think it speaks to the medium of communication we're using (you've misinterpreted things I've said as one problem with the medium), mixed with the topic being a very emotionally charged one.
For example, you believe "whole life experience" is something worth noting, as if you have no clue whatsoever about how bad humans are at self evaluation.
Why wouldn't you know about that? What kind of "critical thinker" goes through life fully unaware of the impact that bias has on their ability to think critically?
A bad critical thinker wouldn't understand this concept.
A bad critical thinker would also not understand the value of avoiding sources from organizations misaligned to their incentives, because they'd know how powerful bad arguments can be, and their inherent limitations at recognizing them as a result of said bias.
I don't know you. But I do know how you've behaved in this conversation, and if you think this conversation is representative of your method of evaluating ideas and arguments, then yeah I would consider your critical thinking skills to be limited, regardless of how much you engage them.
I think you have a rigid idea of what the right idea is with investing and there's some resistance to anything that might challenge that. I understand why you'd feel that way. There's comfort in believing your filter and your method for gaining understanding of this complex world is totally correct. I find myself thinking that way sometimes too!
I have categorized you as someone who has a substantially inflated sense of their capabilities, but when faced with any kind of challenge to that belief they wilt magnificently, usually in the form of, "That's just your opinion."
You discount the concept of bias as inapplicable to you for some reason, which more or less renders you incapable of meaningful critical analysis, yet you falsely think whatever remaining machinations you're capable of are useful.
You're trying to fly without any wings, declaring that you falling on your ass counts, and then refusing to even acknowledge the existence of gravity when its pointed out to you.
I may be entirely wrong about how personal finance works, this is possible and fine with me. What I'm not wrong about however, is your behavior. It's fundamentally and profoundly broken, if its purpose is to accurately predict future outcomes such as you claim it is.
Because we disagree you think there's something wrong with my critical thinking and that I'm unaware of biases. But are you aware of your own?
Typically what we criticize in others is what we fear about ourselves.
Who I am, what I stand for, does not matter. These are facts, and you'll either accept this reality or you won't.
Hopefully you, someone reading this thread, or I get something beneficial out of this, though! I hope you are successful with your investments and they give you peace of mind.
The fact that I'm capable of seeing that and you aren't is what folks ought to glean from this conversation.
Here’s why: An accumulating ETF constantly uses the dividends from its underlying stocks to buy more of itself (instead of paying those dividends out to you).
And it can buy twice as many pieces of itself when it is at 50 versus when it is at 100.
It is thus to your advantage if the ETF is really low for a really long time.
As long as you don't start retirement at the beginning of one of those decade-long periods where the market is flat. It would hurt to have to start selling shares at 50 when you bought them for 100.
This statement here is the key. This is why many times real estate investments work. You more likely to pay monthly payments on a loan with discipline, than have discipline to DCA into a index.
People think and work very differently under 'compulsions' and 'freedom'. There is always a phone to buy, car to change, vacation to take, and eating out to do with the money if you were not forced to put it away, like a compulsory monthly payment.
Even in cases where I have seen disciplined folks, one emergency/pleasure life situation is enough to ensure they fall of the wagon(spend thrift'ism).
This is why most calculations that don't take into account emotional aspects of investments are doomed to fail. And they almost always do. One thing nearly everyone is bad at is waiting, with patience.
Many diets will work if you'll just stick to them. Find an investment strategy you that lets you sleep at night and stick to it for decades. To steal a phrase from a diet book, "compliance is the science".
This is, by the way, the intended strategy behind most index-based retirement funds.
1. You need some way of normalizing shares to produce a statistical sampling of the market, and capitalization is the obvious, existing market mechanism to do this.
2. You need to resist brute attacks on the index investment strategy. I.e. if a giant fund is known to just consider all shares equal, you could soak them by doing wild stock splits to put more of your shares on the market. Or if they consider all companies equal, you could soak them by bringing lots of empty shell companies to the market.
What is the market? The market is something like the returns of the S&P 500 index. How do we get the returns of the market? Make a fund that tracks the S&P 500 index. Why do we have funds that use market-cap weightings? Because we want to track the market.
I guess it's not about having an equal representation of companies or industries or sectors, it's about having an equal representation of where dollars are allocated. The goal isn't to take a dollar and buy a share of each company, the goal is to take a dollar and buy more of the companies that other people own more of and less of the ones they don't?
My point is market-cap weighted index funds are an investment strategy and not some neutral default thing that people seem to think they are (or maybe I'm projecting).
Existing indexes represent tried-and-true weighing methods that have are considered to summarize a market in some useful way. Index funds leverage that on purpose to not do a bunch of bespoke analysis. Not using one of these indexes puts you back in the realm of a managed fund with its own active research and forecasting...?