Demoralizing Realization that I can't beat an Index Fund

[value_investor]

Great contributions so far. My philosophy on structuring my portfolio changed about 3 years ago when I read "The little book of common sense investing" by John Bogle who started the index movement through Vanguard. Great read on how indexes win long term because of their low cost, low fees and low attention and research required.

I like to keep at least 50% of my portfolio in index funds. I've mostly got this through smartshares in the NZX50 or the US markets. In saying that, I've breached my own rule of 50% just lately because I haven't topped up on the NZX50 tracking index in about 18 months just because I think its overvalued at the moment. I have done very well on these funds and I don't see myself pulling out of them ever. I see them as almost part of my retirement fund.

Same thing with the US markets but the recent volatility has perked my interest again, so I may come back to it soon as I am holding a bit of cash at the moment.

In saying that, my index tracking funds have not done as well at the rest of my portfolio when I group them collectively (one for my index vs individual picks) for the past two years. I've had a few investments that I've done superbly well on (bought SUM in the 4s and AIR in the 1s), however when you exclude out the high fliers then the index beats out the others.

Its definitely food for thought, on the whole I've picked more losers than winners on a individual basis (by losers I mean they haven't beat the index), however the winners have really taken a rocket ship up to the moon. The index acts like a backstop which shields me from becoming too exuberant on the upside.

[Antipodean]

I do it for the enjoyment and excitement. I started with index funds first as a baseline then moved more into active choices. Original plan was to split 50/50 but now I'm 100% active.

I haven't always done as well as the indices year by year but overall I'm tracking about the same. I could look at that as a failure but I have learned a great deal along the way which to me is more valuable than money.

I'm young and fortunate enough to have a 30+ year investment timeframe so now is the optimal time to take risks on the investment front. So I can play in strange and dangerous areas.

As time moves on I will move back into index funds most likely.

[Scrunch]

Different people will have varying perspectives on that. My challenge to you and to anyone else on here that wants to take this on is to show me another fund manager that's beaten the index for the last 5 years, or a longer period if you so choose. I have to make a decision in the next couple of weeks as a trustee for a family trust on allocation of a significant sum so if there's a better fund manager out there with better consistent medium - long term returns I am all ears.

Part of the problem is "short" periods like 5 years is chance. Lets say a fund as a 1/3rd chance of beating the index by at least a little bit, 1/3rd equaling it and 1/3rd chance of under-performing it. If there were 243 funds, one of these by random chance would have beat the index by at least a little bit for every year of the last five years, even if they had no special skill. The 5-yr winner may have achieved the result by superior stock selection skills, but there's enough funds around that it can just be successive good luck.

Then there's the winner's curse - If you create this "great" track record, you are likely to attract a lot of new money. You may now have a sufficiently large pot that you need to change what stocks you buy or the percentage of the company your fund owns. Your strategy could stop working on this increased volume of activity. BIL and GPG are two classic examples of investment based funds that Brierley had involvement in. From memory they were initially fairly successful, they looked for the next big win to keep this performance going and hit a dud.

[Snoopy]

I've been researching the markets and stock picking on the NZX primarily (with the odd ASX purchase) for approximately 8 years now.

Over the past week I've scoured through all my prior stock buys, sells and taking into account the commissions, foreign exchange and opportunity cost of the funds sitting in a cash management account waiting to buy the next opportunity. I've gone back to my very first buy in early 2010, Ryman Healthcare.

I've come to realize that after countless hours of reading annual reports, press releases, analyst research reports, etc that I would have been far better off to simply just drip feed into an index fund of the NZX50 or S&P500.

It would be interesting to know how much of your underperformance was due to you holding too much cash at times. I think that even if you are a pure index fund investor you should hold cash to take advantage of that surprise market opportunity. Looking at it the other way, not holding cash means that all unexpected market opportunities will be missed. I don't think you should be whipping yourself for holding cash.

The other thing that no-one has mentioned on this thread is the risk taken to get your return. Getting a market return with a lower than market risk portfolio is just as creditable as getting an above market return by taking above average risks. Risk and return always go together. But it is easy to forget this when analysing historical results. That's because once an investment history has played out, then the risk taken to write that investment history is often forgotten.

Not all shares have equal risk profiles going forwards. Particularly those in which the investment case is entirely reliant on future profits, yet the company has a history of not making profits. Speaking personally I would not consider investing in such companies. This means I miss out on all the big gains when big promising companies come good. But I also miss out on the huge capital losses when such companies fail to live up to their promise. For me this has proved an attractive trade off, after I 'learned my lesson' chasing blue sky much earlier in my investing career.

As a value investor you can expect to underperform in a growth market. The benefit of being a value investor will not become apparent until the market has a bad year. At that point you can expect to outperform the market substantially, to the extent that over time you should be able to beat the index by a couple of percentage points per year over time. That doesn't sound much, but it does compound over time.

These days I spend as much time minimizing risk in my portfolio as I do trying to pick my next winner. And by risk analysis, I am not talking about which way the share price is heading!

SNOOPY

[JBmurc]

https://www.cnbc.com/2018/01/03/why-...nvestment.html

Unless one is a Warren Buffett - hard to beat the index.

Or one is a share trader focused on high-risk-return sectors... I know I've averaged a touch over 30% over the years(several etc) ...but then I do take my fair share of risks >>and its the fact I'm not trading millions- billions etc ..I know WB stated it would be easy for most to return 20%+ in the small cap space

[huxley]

Perhaps Smartshares should release the ‘Sharetrader index’

[Benny1]

Perhaps Smartshares should release the ‘Sharetrader index’

Nice one! Sign me up 😀

[JBmurc]

Perhaps Smartshares should release the ‘Sharetrader index’

I understand that's basically "Active fund management" not the "passive index fund management" Value investors talking about ...

[JeremyALD]

Not sure if I've beat the index or not, but over the last couple of years I've done pretty well. However I've also made some bloody terrible decisions which has impacted my returns; mainly MPG and TGH. However I enjoy tracking stocks and find it much more interesting and rewarding than index funds, so as long I'm performing close to the market I'm pretty happy. You also are more likely to have a few big winners if you do your research - HLG and ATM are a couple for me that have well and truely covered a few bad investment decisions.

[voltage]

interesting posts. If most investors used index funds what would happen to the share broking industry?
I looked at my returns on the ASX AND i have failed to beat the index over the last 3 years. How can an individual out perform an index when active management cannot over the long term. They have staff employed full time analysing balance sheets. it must come down to luck.