It is possible to invest and relax without
fretting over the ups and downs of the market. This 12-Step
Program has explained many advantages of passive indexing
over active investing. Investing in this passive approach
provides freedom from stress, anguish and the panic of active
investing. Remember, indexing is not designed to be a quick
fix and does not carry the seductive quality of gambling or
day trading. This approach neither has the sizzle the media
likes not does it feed the adrenaline rush of chasing leads
or returns. Active investing often leads to lost opportunity.
Like most things of value in life, passive investing takes
discipline and time to reap the rewards. It is the most intelligent
and prudent way to build wealth over the long run. Indexing
is a journey, a lifestyle, a process based on a solid academic
foundation of empirical research. Look again at this quick
review of the 12-Step Program. It substantiates the case for
passive indexing by demonstrating the following:
It is virtually impossible to beat
a market over time through active investing.
Indexing is backed by Nobel laureates
who have provided unbiased, rigorous, empirical research,
most notably the Modern Portfolio Theory.
Stock pickers are analogous to gamblers
who rely on feelings and emotions when making bets.
Time pickers or market timers move
money in and out of different investments in an attempt
to profit from short-term cyclical events, which is a
futile endeavor.
Manager picking is not a reliable practice
because the past performance of money managers does not
predict their future performance. Star money managers
fall from their stature sooner or later, since their stellar
performance is attributed to Lady Luck rather than skill.
Style drift is detrimental in maintaining
an efficient portfolio because it changes the portfolio's
risk exposure. This is a problem when risk exposure has
carefully been chosen based on an investor's predetermined
risk capacity.
Silent partners in active management
diminish an investor's wealth by eating large slices of
the investment pie.
Understanding riskese, the language
used to discuss the relationship between risk, return,
and time is essential to engaging in the ownership of
risk.
To achieve above average returns, assets
must be exposed to above average risk over a long period
of time because of the relationship between time, risk,
and return.
Index funds are based on a long history
of data dating back to 1926. Knowledge and understanding
of this long-term historical data helps investors make
intelligent decisions on portfolio asset allocation.
Each investor has a personal risk capacity,
a key component in choosing a portfolio.
The mixture of indexes in a portfolio
or the asset allocation accounts for 100% of the variance
of long-term return. Asset allocation is the most important
decision an investor can make.
The most efficient way to invest is
to hold a portfolio comprised of global diversified index
funds.
Dimensional Fund Advisors (DFA) offers
the highest rated, most efficient and lowest cost institutional
funds, now available to individual investors through registered
investment advisors.
"
A decade ago, I really did believe that the average
investor could do it himself. After all, the flesh
was willing, the vehicles were available, and the
math wasn't that hard. I was wrong. Having emailed
and spoken to thousands of investors over the years,
I've come to the sad conclusion that only a tiny minority,
at most one percent, are capable of pulling it off.
Heck, if Helen Young Hayes, Robert Sanborn, Julian
Robertson, and the nation's largest pension funds
can't get it right, what chance does John Q. Investor
have? "
"Most of
the mutual fund investments I have are index funds,
approximately 75%."
Charles
Schwab, Guide to Financial Independence
"
The investor's chief problem - and even his worst
enemy - is likely to be himself. "
Benjamin
Graham (1894-1976) Legendary American investor,
scholar, teacher and co-author of the 1934
classic, Security Analysis
"
There are two times when a man shouldn't speculate:
when he can't afford it, and when he can. "
Mark
Twain, Following the Equator, Pudd'nhead Wilson's
New Calendar
"
Most investors, both institutional and individual,
will find the best way to own common stocks is through
an index fund that charges minimal fees. Those following
this path are sure to beat the net results (after
fees and expenses) delivered by the great majority
of investment professionals. "
An
understanding of the 12 Steps to Index Funds may
lead investors to believe they can do it on their
own. They absolutely can if they wish, but working
with an investment adviser is still recommended.
Taking the steps to gain a knowledge base of what
works and what doesn't work in the market is critically
important, and every investor owes it to himself
to learn this information. Knowing that money managers
cannot beat the market over the long run is essential
when choosing an investment method. Many investors
decide to manage their own investments through the
no-load index funds now available on the market
through various mutual funds.
