What is the single most important investing belief?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
beyou
Posts: 6868
Joined: Sat Feb 27, 2010 2:57 pm
Location: If you can make it there

Re: What is the single most important investing belief?

Post by beyou »

HongKonger wrote:I disagree with "I cannot know something that would affect the price that everyone else does not know."

I have held press conferences whereby the news I have delivered has pushed a stock price up in a single day by close to 10%.
There are insider trading laws to deal with that.
HongKonger
Posts: 1079
Joined: Tue Jun 21, 2011 10:35 am
Location: Deep in the Balkans

Re: What is the single most important investing belief?

Post by HongKonger »

blevine wrote:
HongKonger wrote:I disagree with "I cannot know something that would affect the price that everyone else does not know."

I have held press conferences whereby the news I have delivered has pushed a stock price up in a single day by close to 10%.
There are insider trading laws to deal with that.
I didn't say I did anything about the knowledge I had in advance.
555
Posts: 4955
Joined: Thu Dec 24, 2009 6:21 am

Re: What is the single most important investing belief?

Post by 555 »

Brody wrote:Everything that I can think of pales in comparison to:
"What matters most is the amount of money that is put away."

In my experience, regardless of the specifics, the following is usually true:
1)People who put away 10% of their income do fine.
2)People who put away 20% of their income thrive.
3)People who put away 30% of their income become relatively wealthy.
10% is nowhere near enough. But most people in the US save more than that in the form of Social Security. In many countries, people save more than that in the form of taxes that will pay for their future government provided old age pensions.

So your general point is right, but the percentages are too low.
555
Posts: 4955
Joined: Thu Dec 24, 2009 6:21 am

Re: What is the single most important investing belief?

Post by 555 »

snyder66 wrote:I thing saving should be first above everything else. A million dollars cash is still a million dollars when compared with someone who didn't save as much. Pick any number to plug in...I think that overall expenses of investment vehicle is second. Followed by return and all of the rest.
Consider the choices you may have.

For example, you may have a choice to spend $1000 on something you want now, or save (and invest) it for later. Not always an easy choice. You need some balance.

Also if you have a $100 not you have a choice to burn it or not burn it. Seems like an easy choice. But that is the form of choice you have with investing expenses. The magnitude of the decision may not be as large as the save-or-spend decision, but it is a much easier decision to make. So you certainly need to consider expenses. It's something you can control.

What to invest in can have the biggest effect of all. (Your stock investments could quadruple you savings. Or quarter them.) But while the magnitude is huge, it is unpredictable and out of your control. You have to do prudent things like diversify.

I don't see how you can rank these things. They're very different.
User avatar
Midpack
Posts: 778
Joined: Fri Mar 14, 2008 9:34 am
Location: NC

Re: What is the single most important investing belief?

Post by Midpack »

Rick Ferri wrote:Maintaining discipline through thick and thin is the key to investment success.

Rick Ferri
+1. Darn it, that's what I was trying to say with my (in retrospect) long-winded post... :oops:
You only live once...
rustymutt
Posts: 4001
Joined: Sat Mar 07, 2009 11:03 am

Re: What is the single most important investing belief?

Post by rustymutt »

I was taught to pay yourself first out of all earnings, and stay clear of debt.
Even educators need education. And some can be hard headed to the point of needing time out.
retcaveman
Posts: 911
Joined: Wed Oct 21, 2009 8:12 pm

Re: What is the single most important investing belief?

Post by retcaveman »

Educate yourself before investing your money. A lot of mistakes can be avoided if you invest in some basic financial education.
"The wants of mortals are containers that can never be filled." (Socrates)
Dadarkar
Posts: 161
Joined: Tue May 22, 2007 9:23 pm

Re: What is the single most important investing belief?

Post by Dadarkar »

I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
User avatar
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Re: What is the single most important investing belief?

Post by Taylor Larimore »

Dadarkar wrote:I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
Hi Dadarkar:

If your single most important investment belief did not help you in last year's Boglehead Contest, why not try staying-the-course with a long-term asset allocation plan.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Dadarkar
Posts: 161
Joined: Tue May 22, 2007 9:23 pm

Re: What is the single most important investing belief?

Post by Dadarkar »

Taylor;

I agree 100%. Although I agree market timing is a dangerous game. I am a follower of "staying the course"philosophy. However, I also believe in buying more assets - mainly index stock funds in your simple 3 fund portfolio. when valuation is attractive.
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

This thread now reminds me of Ric Edelman's 2000 book, "Ordinary People", Extraordinary Wealth". In it, he has 8 lessons learned from a survey of 5,000 successful investors. I plan to read it again tonight, and will post my synopsis tomorrow.

Thank you, all, for your contributions. This has been most interesting.

Keith
Déjà Vu is not a prediction
fundtalk
Posts: 334
Joined: Tue Jun 05, 2007 3:52 pm

Re: What is the single most important investing belief?

Post by fundtalk »

It's got to be staying the course with your investment plan. The Dalbar study and morningstar investment returns clearly show that investor behavior, performance chasing and panicking are far more important than belief in EMH, diversification, etc. An investor's eventual results are going to depend much more on their discipline, than on whether they choose active vs index, whether they go TSM vs slice and dice, etc.

Obviously, without saving you can't invest, but I consider that as more of a prerequisite to investing, not an actual belief. One must have the ability to delay gratification by saving rather than spending to become an investor. I wouldn't really consider that an investing belief, but I suppose in a very broad sense it is, and is certainly the main determinant of eventual wealth.

PS..."Cage it up!" :lol
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

fundtalk wrote:It's got to be staying the course with your investment plan. The Dalbar study and morningstar investment returns clearly show that investor behavior, performance chasing and panicking are far more important than belief in EMH, diversification, etc.
fundtalk
I'm going to bring up the chicken and the egg, or the "Why? Why? Why? Why? Why?" method advocated by some process change gurus.

Which came first? Discipline or belief? Why do you have discipline?

For me, its the efficient market hypothesis. I think it's easy to see how a belief in EMH leads to a philosophy of diversification. I think it also leads to the understanding on things like market timing that reinforces your discipline.

In my original post, I missed a couple of precepts. You must save. And you must seek education and understanding.

It is only if you have a deep belief and understanding (self-confidence) that you will develop the discipline.

Keith
Déjà Vu is not a prediction
peppers
Posts: 1650
Joined: Tue Oct 25, 2011 7:05 pm

Re: What is the single most important investing belief?

Post by peppers »

Learn, then earn.
"..the cavalry ain't comin' kid, you're on your own..."
kyounge1956
Posts: 333
Joined: Mon May 31, 2010 5:39 pm

Re: What is the single most important investing belief?

Post by kyounge1956 »

Brody wrote:Everything that I can think of pales in comparison to: "What matters most is the amount of money that is put away."(snip)
bob90245 wrote:Savings rate is more important than earning a high rate on what's been saved. (snip)
NAVigator wrote:Living below your means. (snip) From this simple practice, all subsequent investing beliefs are just refinements.
+10! The Richest Man in Babylon puts it this way: "A part of all you earn is yours to keep."

If you spend every penny you earn, you won't have anything to invest, and if you have no investments, your beliefs on the topic don't make a particle of difference.
Last edited by kyounge1956 on Sat Jan 07, 2012 8:12 pm, edited 1 time in total.
AgnosticInvestor
Posts: 101
Joined: Sat Dec 10, 2011 7:33 pm

Re: What is the single most important investing belief?

Post by AgnosticInvestor »

To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: What is the single most important investing belief?

Post by ruralavalon »

Broad diversification with low costs wins.

Is that 2 most important things?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
milestogo
Posts: 193
Joined: Sun Aug 08, 2010 7:16 pm

Re: What is the single most important investing belief?

Post by milestogo »

Save, save,save! Need to save at least 10% and more if possible. Spending money won't buy happiness.
DIY-don't support a financial advisor! Use the wiki and good advice found here.
Use any tax advantaged account available.
retcaveman
Posts: 911
Joined: Wed Oct 21, 2009 8:12 pm

Re: What is the single most important investing belief?

Post by retcaveman »

AgnosticInvestor wrote:To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
May want to think about mandatory withdrawals. Some folks will have more TI and owe more tax in retirement than when they were working. As others have suggested, it may make better sense to contribute to 401k's up to any employer match and then do a Roth IRA.

Investing and taxes are too complicated. If you follow general principles, you may actually be hurting yourself.
"The wants of mortals are containers that can never be filled." (Socrates)
SP-diceman
Posts: 3968
Joined: Sun Oct 05, 2008 9:17 am

Re: What is the single most important investing belief?

Post by SP-diceman »

It has to be that the future will give you a return.
Why would you ever invest in stocks, bonds, real-estate, if you thought the market would go to zero?


Thanks
SP-diceman
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

Dadarkar wrote:I believe one should buy assets which are on sale. Like stocks were undervalued in 2008-2009, gold was in 90's and real estate for last few years. I like Warren Buffet's principle " Be fearful when others are greedy, and be greedy when others are fearful." Bill Bernstein has written about this in his book" The Investor's Manifesto".
There's no evidence that it's possible to tell when assets are on sale. You can't go by what Warren Buffet says for two reasons -
1. we don't know what his algorithm is so there's no basis for assuming you can do whatever he did
2. Most of his success came from buying companies, not just a few shares of stock like us.
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

SP-diceman wrote:It has to be that the future will give you a return.
Why would you ever invest in stocks, bonds, real-estate, if you thought the market would go to zero?
Thanks
SP-diceman
Of course the market will give you a "return" - the return might be negative or break even. But any assumption that the market will go up (or for that matter, go to zero) has no logical basis. The market will do whatever it does but there no empirical evidence that there's any way to predict what that will be.
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

plnelson wrote:
Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
Yes,

There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.

Looking at the history helps you to understand how the market has valued investment risk in the past. It is not a prediction.

By the way, that's what my tagline means :)

Keith
Last edited by umfundi on Sat Jan 07, 2012 8:52 pm, edited 1 time in total.
Déjà Vu is not a prediction
User avatar
GregLee
Posts: 1748
Joined: Wed Oct 27, 2010 3:54 pm
Location: Waimanalo, HI

Re: What is the single most important investing belief?

Post by GregLee »

For me, as for some of you, it has been the efficient markets idea, which I encountered first, I think, around 1980. I don't think it was much discussed in the popular financial press at that time. I was not really interested in the details of investing, and what the EMH meant to me was that I didn't have to find out about it, so long as I bought market securities. I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.

Of course, to invest, you have to save something back from your income, and the more you save the more you can invest, but that's pretty obvious. The EMH was not at all obvious to me.
Greg, retired 8/10.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Re: What is the single most important investing belief?

Post by relentless »

Great thread!
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

Greg,

Which leads me to a parallel theory of consumption.

Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.
I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.

Keith
Déjà Vu is not a prediction
User avatar
GregLee
Posts: 1748
Joined: Wed Oct 27, 2010 3:54 pm
Location: Waimanalo, HI

Re: What is the single most important investing belief?

Post by GregLee »

umfundi wrote:Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.
Yes, and in the same vein, I can feel free to invest in actively managed mutual funds, these days, because I can assume that those whose management fees were not justified by higher returns will have been driven out of business through the competition of passively managed index funds.
Greg, retired 8/10.
Tuxx
Posts: 863
Joined: Tue Mar 30, 2010 1:19 am

Re: What is the single most important investing belief?

Post by Tuxx »

Compounding interest.
Tuxx
Posts: 863
Joined: Tue Mar 30, 2010 1:19 am

Re: What is the single most important investing belief?

Post by Tuxx »

peppers wrote:Learn, then earn.
Earn then learn would probably work out better.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Re: What is the single most important investing belief?

Post by relentless »

Tuxx wrote:Compounding interest.
Compounding returns.
grok87
Posts: 10512
Joined: Tue Feb 27, 2007 8:00 pm

Re: What is the single most important investing belief?

Post by grok87 »

umfundi wrote:Greg,

Which leads me to a parallel theory of consumption.

Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.
I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.

Keith
It's a good point. It's amazing how powerful that is. And how some "sellers" try to circumvent that in any way possible. For example services (plumbing, etc.) don't seem at all competitive to me. Massive ripoff potential. And there are all those MLM scams, Amway, Mary Kay etc. I always want to ask them why they don't sell their products in stores (answer: because then the massive ripoff potential would evaporate).
cheers,
RIP Mr. Bogle.
Tuxx
Posts: 863
Joined: Tue Mar 30, 2010 1:19 am

Re: What is the single most important investing belief?

Post by Tuxx »

relentless wrote:
Tuxx wrote:Compounding interest.
Compounding returns.
Paper gains is a recipe for misery.
User avatar
bob90245
Posts: 6511
Joined: Mon Feb 19, 2007 7:51 pm

Re: What is the single most important investing belief?

Post by bob90245 »

plnelson wrote:
Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
The basis for the belief is that Capitalism, while imperfect, is better than all the other economic systems that have been tried.

Investing also works better if you are well diversified. That way if you happen to live in 1989 Japan (or similar bubble top elsewhere), you won't end up with all your investment nest eggs in just one country market basket that happens to go "pop".
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
relentless
Posts: 457
Joined: Mon Mar 14, 2011 10:05 pm

Re: What is the single most important investing belief?

Post by relentless »

Tuxx wrote:
relentless wrote:
Tuxx wrote:Compounding interest.
Compounding returns.
Paper gains is a recipe for misery.
I don't understand your point. You don't believe in investing in equities at all?

I would add that with rebalancing, you convert equity gains into bonds/cash which is a winning strategy.
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

grok87 wrote:
umfundi wrote:Greg,

Which leads me to a parallel theory of consumption.

Buy as few things as possible (vs. save as much as possible). But then, shop at Costco.
I wouldn't be cheated, because what I bought would be worth the price charged. Dazzlingly simple and elegant.
Not particularly Costco, but it is a great convenience to me to believe that I can walk into any one of a number of my local stores and get a competitive price for virtually any item. In 1980, that was not the case.

Keith
It's a good point. It's amazing how powerful that is. And how some "sellers" try to circumvent that in any way possible. For example services (plumbing, etc.) don't seem at all competitive to me. Massive ripoff potential. And there are all those MLM scams, Amway, Mary Kay etc. I always want to ask them why they don't sell their products in stores (answer: because then the massive ripoff potential would evaporate).
cheers,
grok,

You mean the window replacement guy that knocked on my door this afternoon probably was not offering a good deal? Nor the tree trimming guy nor the roof replacement guy nor the chimney repair guy? Nor the Mormons and the Scientologists?

I am shocked!! http://www.youtube.com/watch?v=-Gf8NK1WAOc

So, let me ask: Why is the market for investment services seemingly so inefficient? All these active management leeches bleeding their clients when there are low-cost no-brainer Boglehead alternatives available?

Or, maybe I am wrong. Investment advice is an efficient market? :?:

Keith
Déjà Vu is not a prediction
SP-diceman
Posts: 3968
Joined: Sun Oct 05, 2008 9:17 am

Re: What is the single most important investing belief?

Post by SP-diceman »

plnelson wrote: Of course the market will give you a "return"
But any assumption that the market will go up (or for that matter, go to zero) has no logical basis.

There’s all types of logic:

Companies will need to keep pace with inflation.
(otherwise they wont be around)

Where are the folks in emerging markets emerging to,
as the impoverished move into the middle class they will require more goods and services.

What are all the children born in the world going to do?
Birth rates create the need for food, housing, education, and the future support of families and their children.



Thanks
SP-diceman
User avatar
Taylor Larimore
Posts: 32839
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

Most Important Belief? Mr. Bogle's answer.

Post by Taylor Larimore »

We cannot let this fine thread end without learning from Jack Bogle who gave us his answer in Common Sense on Mutual Funds:
"Stay the course. No matter what happens, stick to your program. I've said 'Stay the course' a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
AgnosticInvestor
Posts: 101
Joined: Sat Dec 10, 2011 7:33 pm

Re: What is the single most important investing belief?

Post by AgnosticInvestor »

retcaveman wrote:
AgnosticInvestor wrote:To me it's this: shovel as much money as you possibly can into tax-advantaged accounts. I'd rather oversave and retire early than deal with the alternative. In terms of what to invest in, I use low-cost index funds simply because I know what to expect: the market return for a particular asset class. Was I bummed out that TISM underperformed TSM last year? No, not at all. It is what it is.
May want to think about mandatory withdrawals. Some folks will have more TI and owe more tax in retirement than when they were working. As others have suggested, it may make better sense to contribute to 401k's up to any employer match and then do a Roth IRA.

Investing and taxes are too complicated. If you follow general principles, you may actually be hurting yourself.
I do have a Roth IRA and some of my current 401(k) assets are Roth as well. By 'tax-advantaged' I meant after-tax as well. Tax-treatment diversification is something I learned here!
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Ric Edelman: 8 Secrets

Post by umfundi »

In 2000, Ric Edelman published a book, "Ordinary People, Extraordinary Wealth". He surveyed 5,000 "successful" investors, and wrote about what he found. Here it is, in my own words.

Please remember, the book came out in the year 2000. That was two market crashes and one housing crash ago.

1. They carry a mortgage. People had a mortgage about half the value of their homes, and had no intention of paying the mortgage early, even though they could.

2. They maximize their 401(k) opportunity, and don't diversify. (His words) He discovered that the successful investors were buying a mix of US and International total stock market funds. Today, we'd say, invest in the total market.

3. Most of their wealth comes from their own (small) regular savings amounts over time. Inheritances and the lottery are not in the equation.

4. They are not active traders. (The issue of rebalancing investments does not seem to come up.)

5. They do not measure against indexes like the Dow or the S&P 500.

6. They spend less that three hours per month managing the totality of their personal finances. That includes paying bills. And, they never budget.

7. Money is a family affair, including the kids. Do you know about your parents' finances? And your kids? And, vice versa?

8. They pay little attention to financial advice in the popular media.

All in all, this seems like a pretty good list to me.

Keith
Déjà Vu is not a prediction
User avatar
bob90245
Posts: 6511
Joined: Mon Feb 19, 2007 7:51 pm

Re: Ric Edelman: 8 Secrets

Post by bob90245 »

umfundi wrote:In 2000, Ric Edelman published a book, "Ordinary People, Extraordinary Wealth". He surveyed 5,000 "successful" investors, and wrote about what he found. Here it is, in my own words.

<snip>

All in all, this seems like a pretty good list to me.
On the whole, I would agree. But then again, anyone who could fog a mirror could have been a successful investor riding two strong decades of stock returns ending in 2000.

I wonder if there is a follow-up to see if these 5000 successful investors kept their magic touch considering your disclaimer:
umfundi wrote:Please remember, the book came out in the year 2000. That was two market crashes and one housing crash ago.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
User avatar
StealthWealth
Posts: 136
Joined: Tue Apr 26, 2011 11:48 am

Re: What is the single most important investing belief?

Post by StealthWealth »

Surely the most important investing belief is that overtime it will increase in relative value. If someone does not believe that, why would they ever invest?
sschullo
Posts: 2839
Joined: Sun Apr 01, 2007 8:25 am
Location: Long Beach, CA
Contact:

Re: What is the single most important investing belief?

Post by sschullo »

Believe that the market is extremely risky and then plan accordingly.
Never in the history of market day-traders’ has the obsession with so much massive, sophisticated, & powerful statistical machinery used by the brightest people on earth with such useless results.
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

umfundi wrote:
plnelson wrote:
Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
Yes,

There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.
That's not a theory; it's just an assertion. There's no theoretical basis to assume that taking a risk will result in a reward in the future because that assumes the future of markets is predictable and there's no empirical evidence that they are. If markets were predictable then managed funds would do a lot better than they do, i.e, they would do better than random chance.
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

bob90245 wrote:
plnelson wrote:
Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
The basis for the belief is that Capitalism, while imperfect, is better than all the other economic systems that have been tried.

Investing also works better if you are well diversified. That way if you happen to live in 1989 Japan (or similar bubble top elsewhere), you won't end up with all your investment nest eggs in just one country market basket that happens to go "pop".
Capitalism may work better than other systems but there's nothing about that which makes markets predictable. And saying that "the markets will go up" is a prediction. Look: if markets could be predicted (to go up, down, or sideways, or whatever) then managed funds would work better than a random walk. They empirically do not.

If you believe the future is predictable then why are you on a Bogleheads forum?
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

plnelson wrote:
umfundi wrote:
plnelson wrote:
Cloud wrote:That the market will continue to rise in the long run.
I don't think there's any basis for this belief. There's no logical reason to base it on what "the market" has done in the past, and we all know that "past performance does not indicate future results".
Yes,

There is a basis for this belief. It is that investors are taking a risk, and that they will be rewarded with positive market returns for taking that risk. It is a fundamental theory, not an extrapolation of history.
That's not a theory; it's just an assertion. There's no theoretical basis to assume that taking a risk will result in a reward in the future because that assumes the future of markets is predictable and there's no empirical evidence that they are. If markets were predictable then managed funds would do a lot better than they do, i.e, they would do better than random chance.
So, our beliefs do not coincide. Which is fine with me.

But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.

Keith
Déjà Vu is not a prediction
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

SP-diceman wrote:
plnelson wrote: Of course the market will give you a "return"
But any assumption that the market will go up (or for that matter, go to zero) has no logical basis.
There’s all types of logic:

Companies will need to keep pace with inflation.
(otherwise they wont be around)
First of all I assume it goes without saying that any discussion of increases or decreases in any asset value are in real, not nominal terms. If some stock went up 2% but inflation was 4% over the same period I count that as the stock falling, not going up. Why would any investor do otherwise?

Second, OK, so they won't be around. What's your point?
Where are the folks in emerging markets emerging to,
as the impoverished move into the middle class they will require more goods and services.
Sure, but there's no guarantee that this will happen, or even if it does that it will cause markets to rise (for example P/E's could fall) or that an increase in middle-class members in one place won't be matched by a decrease elsewhere.

As I said above, if markets behaved in predictable ways then passive, broad-index investing would not be as successful as managed investing which used various research strategies to "beat the market". But there is no evidence that the market can be beat.
What are all the children born in the world going to do?
Birth rates create the need for food, housing, education, and the future support of families and their children.
But that doesn't mean markets will go up in real terms. The US population has certainly increased in the last 11 or 12 years and the total number of cars and houses in the US has grown, and all sorts of other consumption has increased but the S&P 500 hasn't increased in that time.

No matter how many clever rationalizations one can think of why the markets "should" do something, markets are not predictable, else we wouldn't be on a Bogleheads forum.
plnelson
Posts: 720
Joined: Wed Feb 24, 2010 5:49 pm

Re: What is the single most important investing belief?

Post by plnelson »

umfundi wrote: But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.
Keith
How does EMH imply that risk will be rewarded? EMH says that assets are already fairly priced - and that would include all asset classes. Thus any additional potential gain from a "higher risk" asset is already priced in.

So say we're talking about bonds. Bonds with a higher risk of default have a higher yield, supposedly to compensate the investor for assuming that additional risk. But if yield went up more steeply than risk then a mutual fund could always "beat the system" by buying riskier bonds because the additional yield would more than make up for the higher default rate. The same with stocks. A mutual fund that invested in riskier stocks could always beat the market because the additional risk would be more than compensated for by the higher growth. EMH says that these results would cause demand for the riskier assets to increase until their price cancelled out any advantage. Thus an efficient market would not allow some assets or asset classes to offer better "deals" than others.

But empirically, no fund can beat the market with any consistency, which is why broad market indexed investing is the basis og the Boglehead philosophy.
Topic Author
umfundi
Posts: 3361
Joined: Tue Jun 07, 2011 5:26 pm

Re: What is the single most important investing belief?

Post by umfundi »

plnelson wrote:
umfundi wrote: But, from my belief in the efficient market hypothesis, it is not a great step for me to believe that investment risk will be rewarded.
Keith
How does EMH imply that risk will be rewarded? EMH says that assets are already fairly priced - and that would include all asset classes. Thus any additional potential gain from a "higher risk" asset is already priced in.

So say we're talking about bonds. Bonds with a higher risk of default have a higher yield, supposedly to compensate the investor for assuming that additional risk. But if yield went up more steeply than risk then a mutual fund could always "beat the system" by buying riskier bonds because the additional yield would more than make up for the higher default rate. The same with stocks. A mutual fund that invested in riskier stocks could always beat the market because the additional risk would be more than compensated for by the higher growth. EMH says that these results would cause demand for the riskier assets to increase until their price cancelled out any advantage. Thus an efficient market would not allow some assets or asset classes to offer better "deals" than others.

But empirically, no fund can beat the market with any consistency, which is why broad market indexed investing is the basis og the Boglehead philosophy.
Over and out. Reference my New Year's resolution.

I have no idea how this rant is connected to my original comment. Og.

Keith
Déjà Vu is not a prediction
User avatar
GregLee
Posts: 1748
Joined: Wed Oct 27, 2010 3:54 pm
Location: Waimanalo, HI

Re: What is the single most important investing belief?

Post by GregLee »

plnelson wrote: Thus any additional potential gain from a "higher risk" asset is already priced in.
Right. It's priced in by charging less for the asset than would be charged for a less risky asset. Your reward for taking the extra risk is the increase in the difference between your returns from the asset and the lower price you paid for it.
Greg, retired 8/10.
Post Reply