"How a Second Grader Beats Wall Street" -- A Gem

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"How a Second Grader Beats Wall Street" -- A Gem

Postby Taylor Larimore » Fri Mar 27, 2009 10:25 pm

Bogleheads:

Allan Roth, CPA, CFP, shatters the Wall Street myth that investing is too complicated for ordinary investors. We can all learn from these valuable excerpts in his new book, "How a Second Grader Beats Wall Street":

"Design a portfolio composed of a few basic building blocks than can be "tweaked" to fit your personal needs."

"Reengineer your portfolio to stop needlessly paying taxes."

"A simpler approach to today's market can put you on the path to financial independence."

"Morningstar's ability to turn large amounts of data into simple, understandable information helps investors make better decisions."

"Cut through the baloney that Wall Street wants us to believe and return to basic simplicity."

"It is what we learn after second grade that turns out to be so destructive."

"Common-sense investing isn't actually all that common."

"Investing isn't rocket science. Wall Street experts want you to believe that it is."

"Kevin's magic portfolio: Vanguard Total Stock Market Index Fund; Vanguard Total International Stock Index Fund; Vanguard Total Bond Market Index
Fund."

"By "Wall Street," I mean everybody who's after your money, not just the large brokerage houses."

"Our emotions consistently steer us toward the path that leads only to giving away our hard-earned nest egg."

"Good luck in your process of unlearning the many complicated mental models that we have all blindly accepted as true."

"We strongly resist thinking of ourselves as average."

"For every investor who beats the market in a given year, there is another who's lost by the same amount."

"Always remember that market return less costs equals the average investor return."

"There is one way, and only one way, to build a stock portfolio that is guaranteed to beat the average dollar invested. For the U.S stock market, that one way is to buy the entire market in proportion to the value of each company."

"It's impossible to add a second U.S. stock fund that would improve diversification as it could only begin to overweight one of the style boxes or industry sectors."

"I'm a strong believer in the KISS principle (keep it simple, stupid)."

"Often the right answer is knowing you don't know the answer."

"There are two types of investors when it comes to predicting next year's stock market: 1) Those who don't know. 2)Those who don't know they don't know."

"Over a 20-year period, the stock market has always bested inflation."

"The higher historic returns from small-cap value investing are not a free lunch. They are compensation for taking greater risk."

"With only three index mutual funds, we can own many thousands of securities that own the whole world."

"Cramer is a human cartoon character who rants about buying and selling and encourages others to engage in foolishness."

"I want those money managers to keep bragging. I never know when I'll need more material for another book."

"We investors have no clue as to what we are paying for our investments, and even worse, there is no easy way to find out."

"Lehman Brothers was the most admired securities firm in 2007 according to Fortune magazine. In 2008 it filed for bankruptcy."

"The only thing associated with the market's daily ups and downs that is predictiable is the pontifications of analysts who attempt to explain the often unexplainable."

"A recent study found that funds sold by advisors underperformed those that were bought directly by the consumer."

"People aren't out to make you rich. -- What you don't pay goes to you and will get you to your financial goals much sooner."

"Losing a dollar causes about twice as much pain as the pleaure we get from making a dollar."

"We all know that most mutual funds greatly underperform the appropriate index, but did you know that the average investor underperforms the average mutual fund by another 1.5% percent per year."

"Left to our own devices, we will find patterns for everything. This phenomenon is known as data mining."

"When enough people have a tool to predict stock prices, it ceases to be of any use since the stock would have already reacted to this knowledge."

"Most of us can't get past anchoring to the purchase price."

"We tend to remember our brilliant investments and forget our what-were-we-thinking ones."

"We have a tendency to carefully review any information that supports our decision and dismiss any new information that leads us to believe we may have made the wrong choice."

"There are thousands of financial professionals figuring out how to use your emotions to separate you from your money."

"If you had to close your eyes and pick one of three U.S. stock funds, one of three international funds, and one of three bond fund, what are your odds of picking ones that are in the top third for all three categories? (Answer: One in twenty-seven)"

"Quit paying taxes that you don't need to."

"By some estimates, real estate has more than twice the value of the global stock market."

"Just say No to hedge funds."

"Remember that 10 years is an incredibly short period of time (for investors)."

"The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlatons, Sharpe ratios, and the like."

"Keep precious metals and mining stocks to no more than 10% of your international holdings."

"A mix of bonds with a global stock portfolio dramatically impacts the amount of risk we are taking."

"The higher the default risk, the higher the interest rates bonds must pay."

"I see many people chase yields to get a higher return. I think this is a huge mistake."

"Don't get swindled by investment research that pretends to know what interest rates are going to do."

"Top economists have correctly predicted the direction of long-term interest rates about 30% of the time."

"No-load bond funds can trade bonds with much lower commission and spreads than individuals can."

"I'm still leaning against international bond funds for Americans."

"Never buy an instrument that has a fancy name like Enhanced collateralized debt obligation investment unit trust."

"There has never been a shortage of ways Wall Street had devised to separate you from your money."

"Banks must both return a profit to their shareholders and pay income taxes. Credit unions are exempt from these obligations and can often offer superior rates."

"Investing is much more than maximizing our wealth. It also involves minimizing the chances we will run out of money."

"Our willingness to take risk isn't easy to quantify because it is difficult to measure and very unstable."

"The more we move into and out of the market, the lower our returns end up being.

"I recommend one-third of one's total equity portfolio be in international stocks."

"Remember that staying with your asset allocation is every bit as important as choosing the right one in the first place."

"Rebalancing forces us to sell stocks during up periods and buy during down periods."

"Just say No to instruments like preferred stocks or convertible bonds."

"Wall Street wizards will always be optimistic in an up market and pessimistic during a down market. My advice is to ignore them."

"Investing is simple, but it isn't easy. I tell people to 'dare to be dull.'"

"The most beautiful thing is that low-cost index investing happens to be incredibly tax efficient."

"Locating our assets where they are most tax-efficient can be every bit as important as asset allocation."

"Under nearly any scenario, we are better off to place tax-efficient investments in our taxable account and tax-inefficient investmens in our tax-deferred accounts."

"There is not such thing as a free (investment) seminar."

"Jack Bogle gave any second grader the tools to beat Wall Street."

"In all but a few cases, I recommend staying away from whole life, universal life, and anything in the general vicinity of an annuity."

"If you need life insurance, buy low-cost term insurance."

"Taylor's favorite portfolio is now the same three total market index funds I recommended for Kevin."

"It's human nature to believe these newsletter are offering insights that will make us rich, but actually they are far more likely to lead to underperformance."

"The financial industry can twist logic into a pretzel if it will get you to hand over your hard-earned money to them."

"Make it a rule never to buy a financial investment you couldn't describe to an average second grader."

"Any product that is easy to buy and hard to get out of should raise a red flag."

"Break that old rule of keeping six month's cash on hand. I think a better rule is that we should always have access to six month's cash."

"If the Wall Street brokerage firms were really so good at giving investment advice and managing risk, why did it take taxpayers to bail them out?

"Don't play a loser's game by paying money for one expert to outsmart another expert."

"When you get that irresistible urge to do something, let it pass."

"If you are betting on sectors or even countries, you are speculating rather than investing."

"Remember the goal of your nest egg is to give you the freedom to do exciting things, not to provide the excitement itself."


Thank you Allan Roth.

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"Simplicity is the master key to financial success." -- Jack Bogle
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Postby stratton » Fri Mar 27, 2009 11:16 pm

Allan was at Diehards 7 in San Diego last year so he might show up in Dallas if anyone wants to talk to him.

Paul
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Postby Mel Lindauer » Fri Mar 27, 2009 11:25 pm

stratton wrote:Allan was at Diehards 7 in San Diego last year so he might show up in Dallas if anyone wants to talk to him.

Paul


Yes, Allan will be there and he'll be one of the Boglehead authors signing books in Dallas. Others book signers include Jack Bogle, Bill Bernstein, Rick Ferri and The Bogleheads' Guide authors. (We always have a book signing session scheduled on day 2.)
Best Regards - Mel | | Semper Fi
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Looking forward to Dallas

Postby Allan Roth » Fri Mar 27, 2009 11:38 pm

Thanks for the nice post, Taylor. Diehards 7 was outstanding and I can't wait for Dallas! To be included in the list of folks doing a book signing at Diehards 8 is indeed an honor.
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Postby stratton » Sat Mar 28, 2009 1:49 am

Mel Lindauer wrote:
stratton wrote:Allan was at Diehards 7 in San Diego last year so he might show up in Dallas if anyone wants to talk to him.

Paul


Yes, Allan will be there and he'll be one of the Boglehead authors signing books in Dallas. Others book signers include Jack Bogle, Bill Bernstein, Rick Ferri and The Bogleheads' Guide authors. (We always have a book signing session scheduled on day 2.)

Will the new Bogleheads Retirement guide be out by DH 8?

Paul
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Postby tutaloo » Sat Mar 28, 2009 7:45 am

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tips

Postby gatorking » Sat Mar 28, 2009 8:08 am

my goal is not to make as much money as I can, only to keep up with inflation


So why don't you just invest in TIPS? You are being suckered by a different myth - that you need stocks to keep up with inflation.

In 1975, Bodie wrote his Ph.D. dissertation on the use of common stocks as a hedge against inflation. He considers himself an expert on the subject.

“Historically, in the US, common stocks have been a disaster in times of inflation,” he said, citing the 1974-1975 period as an example of high inflation coupled with a 50% decline in the market. “You cannot rely on the stock market to do the heavy lifting,” said Bodie.


From: http://www.advisorperspectives.com/news ... odie2.html
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Postby kenner » Sat Mar 28, 2009 8:29 am

Tutaloo,

Wall Street has never adopted the Bogleheads method of investing. Wall Street makes its money off "sophisticated" traders like you. Like Las Vegas, Wall Streeters know they will beat you in the long run.

You may be right for a very brief period of time. You may be better than Peter Lynch, Michael Price, Warren Buffet and Bill Miller.

You may be right for the next twenty or thirty years.

I hope you'll keep us posted as to each and every one of your investment transactions on an accurate basis.

In the meantime, please post complete details of each and every one of your trades and your precise asset allocations at all times so we, too, can learn how to beat the market.

I can't wait to read your book on investing. Maybe one of your editors will catch the correct spelling of the word "losing".

Best wishes,
Ken

P.S. The Boglehead's philosophy states that our method of investing does beat the market (as defined by the average investor) about 80% of the time.

Unless you've actually sold your 15 individual stocks, you have not received a profit of that amount, except on paper. Those stocks may be down 30% two months from now, which is when most investors panic and sell.

Bogleheads have never told anyone they can't beat the market, especially over the short run. It's usually the long run that counts.

If you have any desire to learn a true perspective on Wall Street, read David Swensen's book "Unconventional Success". Swensen has a Ph.D. from Yale in Economics, worked on Wall Street for several years, and now manages Yale's Endowment Fund and is a director at TIAA-CREF.
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Postby gailcox » Sat Mar 28, 2009 9:36 am

I'm excited to read Mr. Roth's new book! I can't wait for him to sign it at Bogleheads 8! I can add it to my collection.

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Postby bob90245 » Sat Mar 28, 2009 9:55 am

As Tutaloo states, it is possible to beat the market. However, stock picking and market timing are not among the methods that will provide market-beating performance over the long-term.

Investors should realize that risk and reward are related. And tilting toward the riskier asset classes of value and small stocks will likely beat the market, as represented by the S&P 500, over the long-term.

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Postby tutaloo » Sat Mar 28, 2009 10:52 am

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Postby tutaloo » Sat Mar 28, 2009 10:55 am

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Postby jeffyscott » Sat Mar 28, 2009 11:07 am

A second grader would have beaten wall street by simply putting money in a piggy bank.
press on, regardless - John C. Bogle
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Postby spam » Sat Mar 28, 2009 11:15 am

Sorry Taylor,

but the quoted text was not written by a second grader. It was written by someone more knowledgeable. Now, if a second grader did beat wall street by following the suggestions outlined in your quoted text, then he (or she) would have benifited by consulting with a more experienced person, as a second grader would not have been capapable of formulating those opinions on their own.

Maybe the only difference between a "Boglehead" and other investors is where they get their opinions, and who they consider to be "expert" enough to comment?

While I agree with most of the ideas quoted in the text, I would simply point out this hypothetical "second grader" (who cannot legally invest anyway) would be successful only by followng the advice his fininancial advisor.

The quarrel is with the book title, and not with you.
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The Bogleheads' Guide to Retirement Planning

Postby Mel Lindauer » Sat Mar 28, 2009 11:18 am

stratton wrote:Will the new Bogleheads Retirement guide be out by DH 8?

Paul


Hi Paul:

Yes, our new book is scheduled to be out in time for Bogleheads 8.
Best Regards - Mel | | Semper Fi
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Postby bob90245 » Sat Mar 28, 2009 11:19 am

jeffyscott wrote:A second grader would have beaten wall street by simply putting money in a piggy bank.

LOL! Yes for the child who was in second grade in 2008. However, the child will grow up and live a long lifetime.

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Postby Mel Lindauer » Sat Mar 28, 2009 11:23 am

tutaloo wrote:
gatorking wrote:So why don't you just invest in TIPS?


I understand how TIPS pace both inflation & deflation, thus my purchasing power remains constant. However, for my fixed income allocation, I require the absolute return of every nickel & dime I put in (much like my childhood piggy bank). I love I Bonds for this reason, but can not find it in me to love TIPs in the same way. Just my own personal quirk. For this very same reason, I don't consider Bond Mutual funds to be fixed income, though I understand intellectually, that when held through the maturity period, how the fluctuating NAV comes out okay.



Hi tutaloo:

While I believe each and every investor should do whatever they think is best for them, I simply can't understand how you can state that you want to fight inflation, AND you want to make sure that you get "the absolute return of every nickel and dime", and yet you shun the very investment (TIPS, purchased at auction and held to maturity) which does BOTH.

Whatever floats your boat!
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Postby Adrian Nenu » Sat Mar 28, 2009 11:32 am

"Design a portfolio composed of a few basic building blocks than can be "tweaked" to fit your personal needs."


- I can't wait to read the in-depth advice on how to determine suitable asset allocation, especially the stock/bond mix.

"The beauty of a 3-fund portfolio is that it automatically builds the global portfolio without having to worry about standard deviations, correlatons, Sharpe ratios, and the like."


- how does one determine the right stock/bond mix, risk managemet, correlations - flip a coin?

"Our emotions consistently steer us toward the path that leads only to giving away our hard-earned nest egg."


- like failure to rebalance, underestimating risk and reduce risk thinking the party will last forever.

There is one way, and only one way, to build a stock portfolio that is guaranteed to beat the average dollar invested. For the U.S stock market, that one way is to buy the entire market in proportion to the value of each company."


- per FF can use DFA's small cap value oriented strategy to increase the odds of beting the market.


"It's impossible to add a second U.S. stock fund that would improve diversification as it could only begin to overweight one of the style boxes or industry sectors."
Code: Select all

- when using TSM index, Large caps are overweighed. The additon of small caps and REITs improves diversification.

"Losing a dollar causes about twice as much pain as the pleaure we get from making a dollar."

- so logically, there should be more focus on diversification, risk management and avoiding losses than trying to beat some benchmark.

"Left to our own devices, we will find patterns for everything. This phenomenon is known as data mining."

- yep, like the universal and mistaken belief that stocks will always beat bonds.

"When enough people have a tool to predict stock prices, it ceases to be of any use since the stock would have already reacted to this knowledge."

- nope, just look at people who are obese or smoke - they know that both are bad for them yet continue to do it. Just because investors have the information, doesn't mean they will use it.


"We have a tendency to carefully review any information that supports our decision and dismiss any new information that leads us to believe we may have made the wrong choice."

- exactly, and a good example was the recent discussion on the inverted yield curve as a risk managment tool.

"Remember that 10 years is an incredibly short period of time (for investors)."

- but having two bad bear markets in a 10 year period makes it seem like an eternity. Not to mention the recovery period which is unknown.

"Investing is much more than maximizing our wealth. It also involves minimizing the chances we will run out of money."

- at some point, risk management and preservation of capital take priority over maximazing return.

"Our willingness to take risk isn't easy to quantify because it is difficult to measure and very unstable."

- that's why everyone looks like a genius during bull markets and incompetence is only revealed during bear markets.

"Remember that staying with your asset allocation is every bit as important as choosing the right one in the first place."

- if you don't get it right in the beginning, fix it as soon as you realize your mistake. If the risk increases, do the same.



"Rebalancing forces us to sell stocks during up periods and buy during down periods."

- of do nothing if risk tolerance has changed.

"If the Wall Street brokerage firms were really so good at giving investment advice and managing risk, why did it take taxpayers to bail them out?

- yet some pros on this board keep crowing how the market which is 90% controlled by institutional investors is all-knowing and instantly incorporates all information.

"If you are betting on sectors or even countries, you are speculating rather than investing."

- that's why the equity allocation should be globally diversified based on the global index market weightings.

Adrian
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Postby tutaloo » Sat Mar 28, 2009 11:46 am

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Postby tutaloo » Sat Mar 28, 2009 11:54 am

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Postby bozo » Sat Mar 28, 2009 12:00 pm

FWIW, I have never been contacted by the WSJ lady about how to tweak your CD ladder in troubled times. Somehow, I just don't think that's an "above-the-fold" lead.

Bozo

PS: accidental alliteration there.
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Postby Adrian Nenu » Sat Mar 28, 2009 12:01 pm

It is my 12 month CDs, due to time duration, most at risk of inflation eating them alive - hence, my short time duration, no CD ladder. This could turn out okay, or not turn okay, and may have nothing at all to do with optimal, but it fits me - it's what I am comfortable with. I was raised by depression era parents who only invested in CDs or 6 month treasuries. This is certainly the only time period in my investing lifetime, when my parents ways, made any sense to me at all. Maybe like comfort food, I like my CDs - in fact, I love my CDs.
tutaloo


- inflation is practically non-existant right now so the real return is pretty close to the yield, minus taxes of course if in a taxable account. But you have the peace of mind of a risk free investment and complete safety of principal, unlike the stock markets which can have 50% drops.

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Postby jeffyscott » Sat Mar 28, 2009 12:03 pm

bob90245 wrote:
jeffyscott wrote:A second grader would have beaten wall street by simply putting money in a piggy bank.

LOL! Yes for the child who was in second grade in 2008. However, the child will grow up and live a long lifetime.
`

With the return of stocks (based on VFINX) negative for the last 10 years, one who is about 18 today would likely have done better than wall street by sticking with the piggy bank.
press on, regardless - John C. Bogle
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Postby Adrian Nenu » Sat Mar 28, 2009 12:10 pm

[/quote]bob90245 wrote:
jeffyscott wrote:
A second grader would have beaten wall street by simply putting money in a piggy bank.

LOL! Yes for the child who was in second grade in 2008. However, the child will grow up and live a long lifetime.
`

With the return of stocks (based on VFINX) negative for the last 10 years, one who is about 18 today would likely have done better than wall street by sticking with the piggy bank.

- isn't backtesting great?! Move today's date to 1999 and putting money in a piggy bank doesn't look hot when you can invest in those dot-coms and earn double digit returns :wink:

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Postby tutaloo » Sat Mar 28, 2009 12:14 pm

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Postby bob90245 » Sat Mar 28, 2009 12:32 pm

jeffyscott wrote:With the return of stocks (based on VFINX) negative for the last 10 years, one who is about 18 today would likely have done better than wall street by sticking with the piggy bank.

True. Doesn't happen often. But in the past, t-bills have beaten stocks for 10-year periods.

http://bobsfiles.home.att.net/misc/10_y ... ominal.gif

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Postby tutaloo » Sat Mar 28, 2009 12:41 pm

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Postby kenner » Sat Mar 28, 2009 5:52 pm

Tutaloo,

I am happy that you have found a style of investing that suits you and your family. I hope you are successful.

My real quibble is with your statement that the Bogleheads investing methodology is a "myth". To the contrary, as I see it, our investing style is very transparent. We simply believe that a low-cost, indexed, well-diversified, consistent approach to investing beats most investors who rely on riskier, more expensive investing techniques that involve market timing, stock picking, and/or paying fund managers who, over the long haul, usually underperform solid index investing.

We are comfortable with the histoically above average returns offered by indexing rather than risking market underperformance while gunning for an A+ total return, where much of the money winds up in the hands of the Wall Street types.

Best wishes,
Ken
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Re: tips

Postby baw703916 » Sat Mar 28, 2009 6:23 pm

In 1975, Bodie wrote his Ph.D. dissertation on the use of common stocks as a hedge against inflation. He considers himself an expert on the subject.

“Historically, in the US, common stocks have been a disaster in times of inflation,” he said, citing the 1974-1975 period as an example of high inflation coupled with a 50% decline in the market. “You cannot rely on the stock market to do the heavy lifting,” said Bodie.


From: http://www.advisorperspectives.com/news ... odie2.html[/quote]

Recency!!! :roll:
Most of my posts assume no behavioral errors.
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piggy bank

Postby Allan Roth » Sat Mar 28, 2009 9:15 pm

For those that think money in a piggy bank would have done better than a second grader portfolio, consider how a moderate annually rebalanced second grader portfolio did over the last ten years, ending 12/08.

40% Total Stock (VTSMX)
20% Total Int'l Stock (VGTSX)
40% Total Bond (VBMFX)

During this 10 year time frame, which had two of the four largest bear markets in history, this portfolio earned 36%. Yes, costs are critical but so is rebalancing. I'm not arguing that a 36% return over 10 years is great but it wasn't the disaster that most investors had.

To be a successful investor, one must keep expenses and emotions under control. Emotions are much harder for us adults because money means more to us than it does to a second grader.

Yes investing is simple enough for a second grader but it's not so easy for us adults.
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Re: piggy bank

Postby bob90245 » Sat Mar 28, 2009 9:44 pm

Daretobedull wrote:For those that think money in a piggy bank would have done better than a second grader portfolio, consider how a moderate annually rebalanced second grader portfolio did over the last ten years, ending 12/08.

40% Total Stock (VTSMX)
20% Total Int'l Stock (VGTSX)
40% Total Bond (VBMFX)

During this 10 year time frame, which had two of the four largest bear markets in history, this portfolio earned 36% [cumulative].

And a piggy bank holding t-bills over the ten years ending 12/08 would have earned 37% (cumulative). Let's call it a tie. :wink:

Source: http://bobsfiles.home.att.net/download.html#Performance
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Piggy Bank

Postby Allan Roth » Sat Mar 28, 2009 11:05 pm

...and that's the point - during the worst 10 years of the stock market in our lifetime, a low cost rebalanced 60% equity portfolio tied the T-Bill piggy bank.

During an average decade in the market, equities have their place IF[/b] one can avoid those expenses and emotions.
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Postby Random Musings » Sat Mar 28, 2009 11:32 pm

Tutaloo,

If the Boglehead strategy (if there really is one) is a myth, according to you - why do you have any skin in it?

Obviously, you think there is some merit by hedging your bets. If you really stuck to your beliefs, you'd be all active.

So go all active and release yourself from this "myth".

RM
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Postby Adrian Nenu » Sun Mar 29, 2009 2:46 am

And a piggy bank holding t-bills over the ten years ending 12/08 would have earned 37% (cumulative). Let's call it a tie.


- the piggy bank holding T-bills did it with virtually no risk. Very important detail.

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Postby tutaloo » Sun Mar 29, 2009 8:39 am

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Postby kenner » Sun Mar 29, 2009 9:59 am

Tutaloo,

I am glad to hear you are doing well. It sounds like you have educated yourself and have developed an investment plan that suits you.

Bogleheads only real goal is to try to help investors who feel they may need investment suggestions or answers to investment questions. If we can be of any assistance to you at any time, we will be here for you.

I am confident that you have offended no one on this forum. We merely have a view of investing that tends to tune out Wall Street, CNBC, and other short-term investment sales people who have a self-serving profit motive.

I still encourage you to "Google" and do some research on Yale University's David Swensen and read his book "Unconventional Success".

Best wishes,

Ken
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Postby tutaloo » Sun Mar 29, 2009 10:47 am

xx
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Postby acpain2010 » Sun Mar 29, 2009 11:17 am

"It's impossible to add a second U.S. stock fund that would improve diversification as it could only begin to overweight one of the style boxes or industry sectors."


In "All About Asset Allocation," Rick Ferri disagrees.

Who's right?

I think this guy means you can't improve diversification of the total market because then you don't own the total market anymore.
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Investment logic

Postby Taylor Larimore » Sun Mar 29, 2009 11:52 am

Hi Tutaloo:

I am glad you are on the road to recovery. You wrote:

"Probably the main point of Boglehead wisdom that I disagree with, is that people are not capable of selecting stocks for the long term."


How do you respond to this statement by Eric Tyson, author of "Mutual Funds for Dummies":

"The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time experienced money managers is, how should I say, ludicrous and absurd."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Investment logic

Postby baw703916 » Sun Mar 29, 2009 12:28 pm

Taylor Larimore wrote: How do you respond to this statement by Eric Tyson, author of "Mutual Funds for Dummies":

"The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time experienced money managers is, how should I say, ludicrous and absurd."


Taylor,

Since you started a thread on the Jason Zweig book on Benjamin Graham on the M* site, and linked to it in the thread that speedbump101 started yesterday, here's Zweig's synopsis of how Graham would respond to the question above (from the short summary article for which speedbump101 provided the link):

Finally, Graham discussed the differences between institutional and individual investors. He believed strongly that individual retail investors can outperform professionals, not because they are smarter but because professional investors have a handicap that reduces their effectiveness--namely, benchmarking. No one cares about an individual investor's information ratio, but investors do care about their investment manager's information ratio, and they will fire that manager if the ratio is not high enough.

Graham set out this philospohy in a simple passage:

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused by other persons' mistakes of judgement. (2003 edition, p. 203)


Thinking independently, objectively, and being willing to go against conventional wisdom isn't easy, of course. But this is a far cry from saying it's "ludicrous and absurd".

Best wishes,
Brad
Most of my posts assume no behavioral errors.
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Postby tutaloo » Sun Mar 29, 2009 12:43 pm

xx
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Postby tutaloo » Sun Mar 29, 2009 12:52 pm

xx
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Re: piggy bank

Postby jeffyscott » Sun Mar 29, 2009 3:01 pm

Daretobedull wrote:For those that think money in a piggy bank would have done better than a second grader portfolio, consider how a moderate annually rebalanced second grader portfolio...


The piggy bank comment was not made with regard to beating a moderate annually rebalanced portfolio, it was made with regard to beating "wall street". To me wall street does not equal a moderate annually rebalanced portfolio. So, yes, the moderate portfolio beat wall street, as did the piggy bank, for a circa 1999 second grader.

The point was that the book title is not saying much, since a real-life second grader would in fact have beaten wall street using the old-fashioned piggy bank portfolio. Or was the real point just to poke fun at a dumb book title...
press on, regardless - John C. Bogle
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Don't let the title fool you.

Postby Taylor Larimore » Sun Mar 29, 2009 10:57 pm

The point was that the book title is not saying much, since a real-life second grader would in fact have beaten wall street using the old-fashioned piggy bank portfolio. Or was the real point just to poke fun at a dumb book title...


This is what Charles Ellis, author of "Winning the Loser's Game," wrote on the cover of Allan's book:

“Don’t be put off by thinking the title is too cute. The great lessons of life are simple (but, as Warren Buffett advises, not easy). If you follow these important rules, successful investing is ‘child’s play.”
"Simplicity is the master key to financial success." -- Jack Bogle
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Postby freedomfunds » Sun Mar 29, 2009 11:19 pm

The original post made a lot of bold statements that can not be empirically backed up.

Adriens post should be reposted , because there are many things that indexers ignore at their peril.

1. Valuations matter.
2. Index choice matters.
Index choice matters. | | Valuations matter even more.
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Postby catchup » Mon Mar 30, 2009 12:42 pm

Daretobedull,

I read the recent article about going back to school.

What did you mean by 10-2=8. Was that a reference to the 80/20 stock/bond allocation?

Thanks.
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Criticizing without evidence.

Postby Taylor Larimore » Mon Mar 30, 2009 1:54 pm

freedomfunds wrote:The original post made a lot of bold statements that can not be empirically backed up.


Hi freedomfunds:

Which are the "bold statements" you refer to?

Please "back up" your contrary opinion.

Thank you.
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Postby Adrian Nenu » Mon Mar 30, 2009 2:09 pm

http://www.evansonasset.com/index.cfm?Page=13

Steven Evanson on point of entry & returns, valuations, rolling 20 year periods and bonds vs stock returns. Makes a good case for overweighing equity during bear markets which is in line with Benjamin Grajham and Warren Buffett. Other good reading material as well.

Adrian
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Postby redrock » Tue Mar 31, 2009 3:23 am

tutaloo wrote:
Random Musings wrote:Tutaloo,

If the Boglehead strategy (if there really is one) is a myth, according to you - why do you have any skin in it?

Obviously, you think there is some merit by hedging your bets. If you really stuck to your beliefs, you'd be all active.

So go all active and release yourself from this "myth".

RM


This is a fair enough criticism, I think - enough so I examined it. I think perhaps, just as I can not spell, I have a poor understanding of the language. In my mind, I was confusing the word "myth" with only part of it's definition "story". And even that is more derogatory then I am actually meaning.

I have been very ill for many years. Too ill to manage my own finances. About a year ago, some clarity in thinking came back to my mind. I actually understood my taxes for the first time in 7 years (which surely surprised the accountant). It also surprised the financial adviser whom I fired.

In coming back up to speed, with managing my own finances, I undertook to rethink the entire Ballgame, and understand what current thinking was. The Bogleheads Guide to Investing was, of course, one of my basic starting points. But I also wanted to understand this Permanent Portfolio thing, what Buffet was all about (fundamental value investing), why my depression era parents only saved via CDs and 6 month treasuries, and what in the world are these secretive Hedge folks thinking, plus - as I have done all my life, what is this thing called Technical Analysis? (I still seem mostly incapable of understanding this, though I seem to understand more then I did in broad strokes .. I've taken to calling these folks the "sticky number" folks).

The outcome of all this thinking, on my part, now about one year later, is all of these viewpoints are right and they are wrong, it just depends on what slice of time you set them down in. So what is my Time Horizon? Statistically, medically speaking, the doctors say 17 more years. Or it could be that, plus or minus 10. But this pronouncement sort of frees me of the worry of outliving my money 10 years in a nursing home at age 90 plus. So I could then set the goal for this money - it is to keep pace with inflation. I do not need an equity percentage reflective of my age, as my lifespan is not as long as even average, let alone exceeding average. Looking at the 4 accounts, what do I do with them? In general, what I have allocated to MMF, CDs & Bonds will meet my lifetime needs, and what I have allocated to equities is on the odd chance I am still alive 20 years from now. Maybe I could afford a really plush hospice experience? Thus, any monies I have allocated to equities has a minimum time horizon of 20 years, but is not necessary to cover my expenses for the next 17 years.

Perhaps "viewpoints" is the right word I should have chosen, rather then the word "myth"? The Bogleheads way is one viewpoint whose source is the collective wisdom of the the investing world, as has been told over the years? As my conclusion is that all of these viewpoints are right, and they are wrong, depending on what slice of time you set them down in - I have incorporated the Boglehead viewpoint as one of the viewpoints into my investment portfolio.

And as I have noted in this thread, probably the main point of Boglehead wisdom that I disagree with, is that people are not capable of selecting stocks for the long term. We are capable of selecting attractive CD rates, but not individual stocks - Wall Street always beats us. Actually, I have learned enough to be dangerous, and presume I will have never learned enough to be safe. One thing that has begun (over the past 4 months) to be amusing to me, is to watch Wall Street sucker the very last buyers in. If you hear it on CNBC, that such and such a thing is a good thing to buy, it is almost always the signal that Wall Street is suckering the last buyers in. Thus, sell the darn thing. In fact, when that WSJ lady contacted me, wanting to write a article how retail investors were getting enthused about the markets again - that is precisely what that is ... Wall Street advertising to sucker the last buyers in. Drum up the siren song, scare those retail investors back in, thinking they might be missing out on something big - and whosh, Wall Street will gladly sell their shares to the retail investor (at much higher prices then they bought at of course, leaving the retail investor with the losses). Will that happen? Who knows. One thing I definitely agree with the Bogleheads about is that no one knows the future.

With my lack of language skills, I really ought to keep my mouth shut. Its just that over the past year of coming back up to speed, I've come to believe quite strongly, that we all need to decide what is best for ourselves and our families. I presume all the Bogleheads here have done so. For me, its more like I've rediscovered the wheel, or something.

I am sorry if I offended anyone.
tutaloo




I found your posts very interesting and wish you all the best in your recovery. I am a novice investor(actually all in cash and CD's) but have found the good people on this board very helpful and friendly, especially after two less than satisfactory experiences with "financial advisers". I,too, have had some health issues(colon and prostate cancers)and worry about what is best for my family. I have found this board very interesting and comforting for me. Again,all the best and try to treasure each and evry day.
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Postby freedomfunds » Tue Mar 31, 2009 3:35 am

You first, Taylor

freedomfunds wrote:
Taylor Larimore wrote:Hi Seth:

Don't overlook these 14 benefits of indexing:


."

3. Consistency: Vanguard's Total Stock Market Index Fund ranked among the top 25% of large-blend funds in just two of the past 10 years. Nevertheless, because of it's consistency, only twice falling below average, it outpaced 85% of all large-blend stocks after taxes.

4. Continuation: Of 355 actively managed equity mutual funds around in 1974, less than half survive today. Indexers do not have to worry that their fund will disappear.

5. No style drift: We know that asset allocation determines about 90% of portfolio performance. Managed fund allocations often change.




Now, lets look at some facts that this ignores.

3. In the last ten year rolling period, mid and small caps outperformed large caps by a huge margin.

As of March 2,2009.
SP 500 LARGE CAP : -3.55 a year annualized over 10 years.
SP 400 MID CAP: 3.587 " "
SP 400 small cap 3.548 " "

http://www2.standardandpoors.com/portal ... 0,0,0.html

The 85th* percentile of TSM is merely because they had mid and small cap exposure . According to Morningstar it only outperformed 60 percent of active funds, but why quibble over that when there's more important fish to fry.
This deceptive comment omits the 500 Index Fund which is pure large cap? WHY?

http://quicktake.morningstar.com/FundNe ... mbol=VFINX
The poster ignores the 500 INDEX BECAUSE IT LOST TO 56 PERCENT OF ACTIVELY MANAGED FUNDS IN THE LAST 10 YEARS

4. Indexers have other things to worry about. Vanguard recently switched its Small Cap Index to track one index from another index. How has that decision been working. Vanguard Small CAP is in the 75th percentile (Lost to 3/4 of small caps) over the last decade.

5. Style drift can benefit mutual fund investers, if the mutual fund goes after sectors/regions that have higher growth expectations. See AGTHX, and other American Fund large caps for examples.
Index choice matters. | | Valuations matter even more.
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