Two comments came in yesterday that were of a similar vein. They were both from do-it-yourselfers expressing some level of frustration. One comment noted that most managers lag the market as do most individuals and the other commenter said that the harder he tries, the worse he does. Reader number one is considering the lazy route and reader number two said it might be a good idea to buy stocks like Johnson & Johnson (client holding) and never sell.
So a fair bit of frustration expressed by these folks. It might have just been venting or maybe they really are entertaining some big changes.
Beating the market seems to be a priority for a lot of people who only have one client. If you manage your own portfolio you are dealing with the long term pressure to have enough money when you need it. You probably don't think about it except when the market is correcting but it's there and let's face it, having enough money strikes at the very core of a lot of people's fear and motivation. When you add in the more palpable, but less important, pressure of beating the market you compound the emotions that make the task more difficult.
If you plan to retire in 2017 what do you really need from your portfolio today? You need to feel like you are on a path that will allow your portfolio to generate X dollars per month in ten years. You do not need to beat the market by any amount.
The market averages 10% per year and if you have been investing long enough to know you can only average 7% then when you use one of those investment calculators online or make a financial plan you should use 7% in your calculation and not 10%. In this circumstance you should also plan on saving more.
I have written a zillion times that over long periods of time people should expect to lag the market some years and beat it others. This seems fairly obvious so worrying about lagging the market seems unnecessary, furthermore no one looks back at a failed financial plan and says"ooh, if only I'd beaten the market back when I was 44."
If you are where your financial plan calls for you to be right now, or even ahead of your plan, does your relative return matter at all? Having enough money, or not, is about planning. Too much concern over beating the market is about ego. The sooner you can realize this the better off you will be.
One last point that we have not even touched on is risk adjusted returns. A little over a year ago a recurring theme on this site was building a portfolio that captured 80% the market's return with only half the volatility. This turned out to be a very popular concept among readers and it is a very valid goal, especially for people who save properly making beating the market even less relevant.
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32 comments:
Roger,
Any interest in exploring taking on more risk (volatility) for a greater reward? I'm in my early 30's and feel that I still have plenty of time before I retire (although I've set my goal to retire by 35 [grin]). I've been exploring more volatile portfolio configurations. Since I'll be making regular contributions, I feel that the volatility may create opportunity (i.e. buying things quite low and selling them quite high). Just an idea that's merely in its studying phases at this point for me and didn't know if you ever consider that an option to people who aren't retiring in the next 10 years or less. Maybe that's not your clientele.
if you use stocks you probably know how to increase vol. if you refer to a 401k you are limited by the choices. if you use etf/funds outside a 401k I think that would be more difficult to find higher vol.
if you believe the stats about beating the market then seeking out more risk more reward becomes difficult to succeed with and I think would require more trading to have a shot of outperformance.
Just a comment about 401Ks...
many company funds are adding
a brokerage account for employees
so they may purchase ETFs etc.
...not as limited as before...
you have more control. We may
see more of this as pensions
disappear etc.
Probably wrote this before, but I firmly believe in a two portfolio system, a Permanent Portfolio that has the majority of your conservative security assets in a diversified proportion to mitigate risk and a Speculative Portfolio of security assets that is your risk money (not essential to your life style) invested in a spectrum of higher risk ventures which hopefully will juice up your total return.
To mix necessary retirement funds with Las Vegas-type investments invites knee-jerk trading and a loss of presence to know the difference between investing and gambling.
Even with two separate portfolios,
investing 100% in securities without considering other investments,such as active real estate ownership, is not my idea of diversification.
I know HOW to increase vol :) ... I was just curious to know if anyone goes down that path. Everyone talks about decreasing it, but I've been on an investigative path recently going against conventional wisdom. I call it my "volatility creates opportunity" study. So far, it's inconclusive.
T, I couldn't agree with you more. This is exactly what I do. I have a wild individual stock portfolio that consists of less than 10% of my overall holdings and my "doing it like a grown up" portfolio that consists of my desired asset allocation makeup. I also own commercial real estate (i.e. the actual brick and mortar) for some diversification as well. This is another long term holding.
Thanks Roger. I'm very vulnerable to what I'll call "the next big theme" syndrome and, as a result, my portfolio is constantly whip-sawed. For instance, I'm now feeling that I need more diversification into vehicles that weren't even available until recently (e.g., commodities, private equity, currency hedges.) Maybe I need to watch that 200 dma more closely, too. And how are those newer, untested ETFs doing (e.g., DEM?) You get the idea...
As a newbie visitor to your blog, I'll go back and read the risk adjusted return comments. They should be helpful.
Also, someone tells me that this book coming out by Ben Stein and Phil Demuth has some interesting information with regard to my inquiry. I have a note to pick it up as soon as it comes out.
At the upper right of your page there is a picture of Neil Cavuto eating an ice cream cone, or something.
Umm... why ???
Sometimes I like to consider what would be the worst possible trades.
Would that be long or short gold, u.s. reits, homebuilders, large cap, smallcap, etc. you get the idea. Well isn't every trade just as problematic as doing the most stupid thing? Is it ever clear?
charlie
Roger,
I read your insightful blog regularly and please keep up your good work. Are you aware of new Agri ETF(MOO) containing most of intl/major agri cos, I searched your blog but couldn't find any reference
re the 401k brokerage, it is a great thing where it is offered, we have a couple of those, same as a SEP which is what I have.
listen to what T says.
7:27 anon, I have written many times that I am a sucker for a story. I do leave them alone but they all sound great.
Charlie I doubt it is as clear as we would all like but somethings are clearER, I think.
I wrote about MOO for TSCM. Generally I like the theme and am mulling it but more likely a common stock.
Hi Roger,
I agree with your post. I'm also interested in building a portfolio that can capture 80% the market's return with only half the volatility, and have started working toward that goal. I found one of your old posts that discusses this concept at:
http://randomroger.blogspot.com/
2006/09/hmmmi-wonder.html
I think PRPFX could also be added to the list of funds that were given in the comments section of the post (disclosure: I own shares of PRPFX). Roger (or anyone), have you discovered any other low volatility funds that might fit in with this concept? Thanks!
Rich
http://randomroger.blogspot.com/2006/09/hmmmi-wonder.html
i wrote at length about the Merger Fund in this regard. I don't own it, I don't know if it is adversely affected by the liquidity crisis
the James Stewart article I linked to yest mentioned the Hussman fund positively as an absolute return vehicle
I blew about $20000 today trying to up my returns for the year by day trading BIDU. I went from up a few percent on the year to break even in my 401k.This is painful but a lesson learned. I cannot beat the market every year and I need to except that before I blow up again. Trading is not meant for an old timer like myself.
DaveW
Hopefully $20,000 was a small percentage "to which I say salud don Corleone" but from the tone of your comment I sense mere frustration from a "bad trade" as opposed to ruin that might have come 7 years ago from letting more ride on Infospace.
Thank you for sharing this with us.
Chiming in here with a different perspective...
I'm an individual investor. I am actually beating the market, both near term and long term. But as an individual investor, it isn't really relevant to me whether I beat the indices (no special compensation or reputation for that). What's relevant is whether the excess return for the time I put into investments is worth it compared to a totally passive strategy. I go back and forth on the calculation because it's not a simple one for me. Intellectually, I believe in buying stuff that makes sense on an expected DCF basis. And for that reason, my portfolio doesn't look like the broader market indices, and it's also harder to find the right passive benchmarks, not only for comparison but also to represent alternatives I might actually consider (some of the Third Avenue funds are candidates, and they tend to outperform over the long term also). So from year to year I end up tweaking what I do as a function of both the market conditions and individual lifestyle factors that compete for my time.
It's human nature and I guess we are predisposed to treat everything we do as some sort of game and the need to win at everything. I personally don't understand why it's necessary to "beat" the market. P.S. the indexes "almost" always do worse than the majority of active managers on the way down. Just remember the pain one experiences from a loss is twice as great as the enjoyment one gets from a gain.
But hey who am I to stop anyone from treating there portfolio like a fantasy football team. Excuse me while I go find a Peyton Manning to hedge out my LaDanian Tomlinson.
more emotion coming from losses than gains is a HUGE point to understand. its the first thing i ever learned about behavioral finance and might be the most important part of behavioral finance.
My company's 401K is run by Fidelity. It really sucks. In a very limited and unbaslanced set of choices, five of the funds are closed. A 401K stuffed with closed funds? What the hell is that?
There is no (open) international stock fund, no real estate fund, no treasury only bond fund, no natural resources fund. What isn't there is a longer list than what is there.
There is just one index fund.
I hate Fidelity.
Hi Anon 1:52 PM,
I'm wondering if the funds you believe to be closed are only closed to new, private investors. Perhaps these funds are still open to those enrolled in your 401k plan? Perhaps you could check it out with your HR department.
Rich
The configuration of the roth 401 k's and others are basically designed to help firms not investors( that part is not advertised).
My company's 401k is run by Fidelity. The range of funds, etfs and stocks available is vast. I've had really decent service from their reps, the website is great, and trades are executed seamlessly. So I've had a different experience with Fidelity than the previous post.
Rich, from 11:39 am, wanted to know of low volatility funds that could grind out moderate positive returns, for most years. Here’s my short list of open end funds, of that type:
Alpha Hedged Strategies-ALPHX
Alpine Dynamic Dividend-ADVDX
Am Century Equity Income-TWEIX
Arbitrage Fund -ARBFX
Diamond Hill Long-Short A -DIAMX
Fidelity Convertible Securities -FCVSX
Fidelity Select Food-Agriculture -FDFAX
Fidelity Select Paper-Forest Products -FSPFX
Hussman Strategic Growth Fund -HSGFX
Nakoma Absolute Return -NARFX
Penn Avenue Event-Driven Inv-PAEDX
Permanent Portfolio-PRPFX
Pinnacle Value-PVFIX
Price Capital Appreciation-PRWCX
QCM Absolute Return-QARFX
Rydex Managed Futures Strategy H-RYMFX
S&P 500 Covered Call Fund Inc. -BEP
Schwab Hedged Equity -SWHIX
Schwab Hedged Equity Select-SWHEX
TFS Market Neutral -TFSMX
Vanguard Convertible Securities-VCVSX
Vanguard Strategic Equity-VSEQX
Vanguard Wellesley Income-VWINX
Wintergreen Fund -WGRNX
thank you for leaving all these names
Thanks, Roger, my favorite of the group, at least recently, has been “Nakoma Absolute Return” (NARFX). Derived from the “Applied Securities Analysis Program” at the University of Wisconsin,
it’s been around for only 9 months. Note it’s chart, NARFX has been very smooth, so far.
http://tinyurl.com/2tlk9g
Here’s a short excerpt of David Snowball’s write-up explaining the funds pedigree:
“The fund is modeled after two hedge funds co-managed by Messrs. Pickett and Fedenia between 2000 and now. The first fund, Southridge Partners II, prospered during the 2000-2002 bear market: it returned 21% during a time when the S&P500 dropped 37%, it had less than half of the market’s volatility and actually achieved a negative correlation (-7%) to the US stock market. The second fund, Nakoma Partners, has operated during the subsequent bull market: it returned 28% between the start of ’03 and the present, with less than half the market’s volatility and a still-negligible correlation to the stock market.
At about 7% per year, their absolute return strategy is clearly not a get-rich-quick scheme. It is, however, a remarkably powerful diversifier since it operates with essentially no correlation to the stock market. Combined with its low volatility and reasonably high tax-efficiency, the fund might well substitute for the bond component of a long-term investor’s portfolio. Alternately, it might be a core holding for a reasonably conservative equity investor who is more interested in making money steadily, even in the face of a bear market, than in trying for triple digit returns.”
Also, the fund has reasonable expenses for a portfolio that shorts, and has only 39 million in assets. This means their managers aren’t pigs and the fund is nimble.
Whenever I think of Bill Miller or Mario Gabelli, I think…
Sooo…Weee… Onk!, Onk!
Roger...
I made an inquiry previously about alternatives to using cash or double short etfs for the purpose of a defensive plan. The list above of absolute funds is worth exploring, or do you think this is confusing apples and oranges? The goal is smoother ride with lower drawdown.
Do professional money mgrs, let's say of clients with accounts worth 500k to 1.5m, use options any more for this purpose,or has this vehicle moved almost exclusively to mgrs of hedge funds? As I search for asset mgmt the emphasis seems to be more on allocation with low portfolio activity. The more safety a client may seek then the adjustment is done with allocation or introduction of a packaged product.
The most recent "product" pushed is the "structured note." The claim is that the principal is guaranteed and that 80% of the mkt's volatility is captured. Is this just another variation of the annuity products?
If you are a novice and want to get 5-6% return, pick your own stocks... if you are a bit wiser and know enough to know what you dont know, buy an index fund... if you know a little more and understand that a global stock portfolio can get you 13% then buy VHGEX or PGVFX... if you know a little more and realize that really good managers can get you 15% long term with relatively low volatility then just buy FAIRX and get on with your life... if you insist on more and can handle the volatility then hitch a ride on CGMFX for 20%...
If you think that you or anyone else on this board (including Roger) can get you significantly more than these easily investable vehicles then you are likely misguided... no one can possibly know enough about each of the companies they follow to exceed the returns of the best fund managers... but then again you might be the exception to the rule... if I had invested heavily in the four companies which I have direct knowlege of and do business with I would be retired by now ;)
My company got new management and soon there after switched our pretty good 401K to what has to be the cheapest Fidelity 401K they could get. It offers NO stocks. It offers NO ETFs. It is absolute bare bones. It has a set of target retirement date funds. It has a picked over bunch of loser funds that no one in their right mind would choose for their short list.
Roger, you really should read Swenson. This discussion of risk and return is not helpful to average investors.
I'll never understand why advisors, including you, are so willing to offer and accept stock-picking approaches which deliver consistently high cost, below-average returns. Do you really believe that buying Vietnam is a way to diversify risk when someone wishes to expose limited capital to emerging markets?
anon, 340. for the few people I bought vietnam for, yes it was appropriate.
As far as high cost doesn;t that depend on the trade frequency?
My philosophy is what it is and yours I guess is different. Data can easily be mined to prove us both right. Do what it right for you and I'll do the same.
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