Index Investing

[hailstorm87]

Hi guys, I am still relatively new to investing and have read a bunch of literature to support the view that index investing is the 'way to go' for a passive investor who is looking at returns of 6-7% per annum (through dollar cost averaging) over the long term  on equity ETFs (e.g. STI, VWRD, A35, VUSD.L). This is of course contrasted with the 'value investing approach' - which is to buy individual stocks at an undervalue with the long term hope/ view that the markets will come to fully value such stocks. 

I believe the main literature supporting this view is 'A random walk down wall street' and this has spurned a large move into ETFs (such as the Vanguard funds) in the recent years. In sum, the main takeaway of the book is: it is almost impossible for the average investor to beat the market returns since the market is almost always perfectly prices and only the very best money managers can ever generate the 'alpha' to justify active management of funds. As such, it would be best to have the active management be done by the 'professionals' and average investors (like myself) should not even attempt to pick individual stocks.  

Would love to hear of the views and experiences are on this topic. 

(Mods: In case this topic has been created previously, please have this merged to the relevant thread. Thanks!)

[specuvestor]

The excellent classic 30 year old literature to look at is this (disclaimer: I agree with probably 90% of it):
https://www8.gsb.columbia.edu/articles/c...rinvestors

IMHO index investing is as sexy as the nifty fifties or the portfolio insurance or dot coms. As always there are some fundamental truths in it that is extrapolated to stratosphere. I agree with Buffett though that if one doesn't want to spend effort, ETF are good investment alternatives.

Time is the enemy of the mediocre. Over time most ETF of say 3-5 years life you can see that they underperform their respective indices by the fees compounded and unlike managed funds that are worth their salt, of no way to recover.

[Scg8866t]

Hi guys, I am still relatively new to investing and have read a bunch of literature to support the view that index investing is the 'way to go' for a passive investor who is looking at returns of 6-7% per annum (through dollar cost averaging) over the long term  on equity ETFs (e.g. STI, VWRD, A35, VUSD.L). This is of course contrasted with the 'value investing approach' - which is to buy individual stocks at an undervalue with the long term hope/ view that the markets will come to fully value such stocks. 

I believe the main literature supporting this view is 'A random walk down wall street' and this has spurned a large move into ETFs (such as the Vanguard funds) in the recent years. In sum, the main takeaway of the book is: it is almost impossible for the average investor to beat the market returns since the market is almost always perfectly prices and only the very best money managers can ever generate the 'alpha' to justify active management of funds. As such, it would be best to have the active management be done by the 'professionals' and average investors (like myself) should not even attempt to pick individual stocks.  

Would love to hear of the views and experiences are on this topic. 

(Mods: In case this topic has been created previously, please have this merged to the relevant thread. Thanks!)

History may not be a reflection of the future, but just take a look at the annualized return of net net stocks like New Toyo, Teckwah and Spindex compared to the STI ETF. They avg ard 12-13% vs 4-5%. 

I do not buy into the concept of super efficient market(esp in our local market). Price discrepancies are very common, possibly due to a lack of enough real value investors weigtage relative to punters in our local market. Deep research into a companies balance sheet and annual report over the years can give real value to any investors in terms of the potential of a company, I think the acknowledgement of the "potential" can give an edge to an investor over the long term.

I do agree that for those who do not have the time or the means to do research, indexing is probably the next best thing.

[weijian]

hi hailstorm87,
There is an old saying that the 7ft guy actually drowned in the pool that was 6ft deep on average. If u understand why, then it will give u a slightly better understanding of how indexing works, and hence hopefully lead u correctly in the path of contrasting index vs value investing.

[thinknotleft]

I buy STI ETF for my SRS account, which is separate from my main stock portfolio. The reason for taking SRS separately is probably due to mental accounting, hassle to track SRS in my main portfolio.

STI ETF expense ratio is 0.3%, pretty low. My trading costs are definitely more than 0.3%.

[specuvestor]

If investment outperformance over a cycle is less than 0.3% annualised, then index funds should be the next best thing since sliced bread

[hailstorm87]

hi hailstorm87,
There is an old saying that the 7ft guy actually drowned in the pool that was 6ft deep on average. If u understand why, then it will give u a slightly better understanding of how indexing works, and hence hopefully lead u correctly in the path of contrasting index vs value investing.

Respectfully, I think the analogy may not apply in this case. For index investing, one puts in a proportionate sum of their pay into the index over a long period of time. So not only is there an averaging out of returns, but also an averaging out on when the money is put in. 

So, it's more of a case where the 7ft guy jumps into many parts of a pool which is on average 6 ft deep. Some parts he drowns (i.e. on extreme drops in the general market), some part he is neck and neck with the water level, and on some parts he is head and shoulders above the water level. So, in that sense, if you spread out the outcomes, he will technically be on average 1ft higher than the water since the points of 'jumping' into the water is spread out. 

That said, in the short run so far, my stock picks have far outperformed the STI.

[weijian]

hi hailstorm87,
ETFs average 6-7% over the long term --> While this statement is reasonably true, the devil is in the details (and execution). This is the point i am trying to make with the analogy, which i experienced it myself.

- Most passive investors will never develop the temperament to suffer extreme market drops. They will probably drown in that deep part of the pool, rather than become "technically 1ft higher".
- Most passive investors will also never develop the long term view necessary to hold stocks through periods of up and down turns.
- If the market moves sideways or a secular bear develops, DCA through the index is not going to beat inflation. Try asking those who would DCA for the next 10years into the Nikkei since the 90s, or those who done so in the Nasdaq since the late 90s for the next 10years? How about those investors who entered the roaring bull market indexes of the ASEAN Tigers in the early 90s but forget to sell by end 1998? The key to making that fabled 6-7% is still to select the correct indexes (be it sector or region) and then entering/exiting at the appropriate time.

The point i am trying to bring out is: To earn the returns in indexing, while the demands of micro-level fundamentals is lesser than that of security selection, nonetheless still reasonably requires the necessary skills/temperament to get the details correct.

With hedge funds now even hedging a certain portion of their own money to their benchmark indices' ETFs to prevent underperformance, ETFs getting more popular than ever, and a large portion of ETF returns only driven by the largest stocks in the index...the secondary effects remain to be seen. Personally, i think it is only a matter of time when ETFs go the way of portfolio insurance and hedge funds, where the gloss on their halo will be removed.

[BlueKelah]

U are right weijian, etf is just another financial product like unit trust that track a certain part of the financial marketplace without active management. Just like our local REITs, just a matter of time before people realise they are not so flash.

However , we will see more and more of these lower cost investing products as the trend is more towards automation. More and more people are using those robo investment advisor tools also now.

Most big index etf will just track big cap blue chip index. Which though profitable over long term, will not perform as well as portfolio consisting of well picked small cap or value stocks.

Of course some etf allows small time investor to easily trade or have exposure to rising or falling sectors, especially commodities like oil or gold .without having to spend time to look at specific companies in each sector.

Sent from my MotoG3 using Tapatalk

[thinknotleft]

If investment outperformance over a cycle is less than 0.3% annualised, then index funds should be the next best thing since sliced bread

Hi specuvestor, can u elaborate what you mean?

Anyway, spdr STI etf has annualised 1 yr returns of 5% as at Nov 16, which is not bad. 

If u are looking for outperformance, then index investing is not the place to be in. If u are looking for a very lazy way to invest, index investing may be the place for u.