"The ETF Book" -- A GEM
Posted: Fri Jan 18, 2008 9:56 pm
HI Bogleheads:
I have just finished reading Rick Ferri's, "The ETF Book." With amazing research, Rick provides an in-depth look at the many kinds of ETFs and how to use them effectively. These are a few of his insightful passages:
"Exchange-traded funds (ETFs) are a revolutionary investment product that is taking Wall Street and Main Street by storm."
"How securities are selected for an index and how the securities are weighted in an index has a profound effect on the risk and return characteristics of the index."
"The key ingredients that are critical to the success of any portfolio management strategy is to have a belief, establish a plan based on that belief, implement the plan, and stick to it."
"A successful active strategy does not need to achieve higher returns than the markets if the strategy achieves substantially lower risks than the market."
"The first mutual fund originated in the Netherlands at the same time the United States was fighting for its independence from Great Britain."
"The premiums and discounts in price that occur in closed-end funds is a major disadvantage of that structure."
"1928 saw the launch of the Wellington Fund, which was the first mutual fund to include both stocks and bonds."
"The largest one-day decline occurred on December 12, 1914, when the DJIA fell 24 percent."
"No other mutual fund (except Vanguard) has launched an ETF share class in an existing index fund."
"Having an ETF share class helps increase the tax efficiency of Vanguard open-end share classes."
"There are many exchange traded structures approved by the SEC. Each has different operations, regulatory issues, fees, and taxes."
"If you plan on making a single, large, lump-sum investment, then paying one commission to buy ETF shares makes sense. -- But if you are like most people and invest regular sums of money, you may actually spend more on commissions than you would save on ETF management fees and taxes."
"Hope over reason is the way active management is marketed to the public."
"SEC approval of actively managed equity ETFs will unleash a new wave of products."
"Thre are two types of indexes: market indexes and custom indexes. A market index is a measurement tool. A custom index is an investment strategy."
"The CFA Institute is an organization of more than 80,000 investment analysts who lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence."
"It is prudent to dig deep into the indexing methodology so that you can make an informed investment decision about the ETFs you are interested in."
"There are four methods of capitalization weighting used by index providers: full cap, free-float, constraigned, and liquidity."
"The traditional view of an index as being a passively selected and capitalization weighted basket of securities that represents a market is no longer valid."
"Rules for index construction have stretched from the simple and elegant to the complex and cumbersome."
"The important matter for ETF investors is how the index is managed and the characteristics of the index."
"Realize that stock price has nothing to do with a company's market capitalization."
"The Dow Jones Industrial Average is not used in academic studies or in economic analysis. -- It is an outdated and antiquated indicator."
"The mutual fund industry is widely known for chasing investment performance, and ETF companies are no exception."
"One way to capture fixed income exposure in your portfolio is to invest in a bond ETF that follows a broad bond market index."
"Commodities truly are a trading vehicle, not a long-term investment vehicle."
"An educated investment professional should be able to explain the differeneces between ETF types and styles, including the advantages and disadvantages of the indexes they follow."
"It is very difficult to beat the market. Few people can do it consistently enough to achieve the long-term returns needed to justify the time and expense."
"Beating the market is not just achieving a higher return. -- Risk adjusted returns are a more sophisticated approach to measuring the performance of a portfolio or fund."
"To be a successful passive investor, you need to have an unwavering belief that the strategy will work in the long-term."
"Passive investors do not attempt to time markets by forecasting economic changes or charting prices."
"Passive investors understand how difficult it is to beat the markets, and that few people actually accomplish that feat during their lifetime."
"The most important long-term decision you will make in a buy-and-hold strategy is the long-term mix between stock and bond index funds." That decision will explain a majority of portfolio risk and return over the long term."
"It is very difficult to find major asset classes that have consistently negative or low correlation with one another and are expected to deliver returns higher than the rate of inflation."
"The correlation between asset classes change, sometimes frequently and suddenly."
"During a time of crisis, the correlation between major asset classes increase, for example, global stocks."
"Building a portfolio of buy-and-hold investment in the real world requires more common sense than it does quantitative number crunching."
"If an investor wants to take more risk and explore other options, a core and explore strategy is a good compromise between passive and active management."
"If you create a core and explore portfolio, the more exploring you do, the higher the cost goes with no guarantee of higher returns."
"One 40-year-old may think that allocating 65% to stocks is aggressive while the next 40-year-old thinks allocating 80% to stocks is conservative. Only you can decide whether an allocation is too conservative or aggressive for your tastes."
"Market index portfolios are a good place to start the process of designing a mix of funds that is right for you."
"The key component for starting to accumulate wealth is savings consistency. Ideally, a young person will start a savings plan at the same time he lands his first job."
"A new investor does not know their personal tolerance for financial risk. -- Early savers should probably limit their equity allocation to 80% of their long-term investments."
"Using life cycle investing as the backbone of a lifelong investment plan provides structure and continuity to a portfolio."
"A large number of investors have the undying belief that one day they will eventually find an active method that consistently generates superior results. That is ironic since the scorecard between the active strategies and passive strategies clearly favors passive methods. It is very difficult to outperform market indexes."
"There is an old saying on Wall Street. 'The stock market has forecast ten out of the last four recessions.'"
"It is rare to find one major academic mind that believes technical patterns in stock prices reveal future price trends."
"If you decide to go the active route, be prepared to be wrong frequently, humbled regularly, and rewarded occasionally."
"ETFs are versatile. The can be optioned, shorted, hedged, and bundled into other securities."
"By creating a tax-efficient portfolio, you will pay less in taxes, which automatically increases your wealth."
"Developing and managing a nontaxable portfoliio is easier than a taxable portfolio because taxes do not get in the way of decision making."
"It is a good idea to rebalance at least annually, especially if the markets have been particularly volatile."
"If done successfully, tax loss harvesting will increase an investor's after-tax returns."
"Choosing a person or persons to take over your finances is something to do far in advance."
"There are many methods for predicting market returns, and none will be exact."
"It is not an easy task to predict inflation."
"Do not automatically reinvest dividend income (in taxable accounts). Let the income flow into your cash account."
"If you are too busy, too uninterested, too confused, or not able to keep up with your porfolio, then hiring an adviser makes sense. -- I suggest contacting the Vanguard Group and asking for a free copy of 'How to Select a Financial Advisor.'"
"Diehards.org is used by like-minded investors who are interested in keeping costs low. Not all participants are interested in ETFs, but many are knowledgeable about the subject and can pass along the names of other people who are more knowledgeable. I personally participate on the site and am available to answer questions about indexes, ETFs, and low-cost portfolio management."
Thank you Rick Ferri!
The link below is to more great excerpts in our "Collection of Investment Gems":
http://www.diehards.org/forum/viewtopic.php?t=881
Best wishes.
Taylor
I have just finished reading Rick Ferri's, "The ETF Book." With amazing research, Rick provides an in-depth look at the many kinds of ETFs and how to use them effectively. These are a few of his insightful passages:
"Exchange-traded funds (ETFs) are a revolutionary investment product that is taking Wall Street and Main Street by storm."
"How securities are selected for an index and how the securities are weighted in an index has a profound effect on the risk and return characteristics of the index."
"The key ingredients that are critical to the success of any portfolio management strategy is to have a belief, establish a plan based on that belief, implement the plan, and stick to it."
"A successful active strategy does not need to achieve higher returns than the markets if the strategy achieves substantially lower risks than the market."
"The first mutual fund originated in the Netherlands at the same time the United States was fighting for its independence from Great Britain."
"The premiums and discounts in price that occur in closed-end funds is a major disadvantage of that structure."
"1928 saw the launch of the Wellington Fund, which was the first mutual fund to include both stocks and bonds."
"The largest one-day decline occurred on December 12, 1914, when the DJIA fell 24 percent."
"No other mutual fund (except Vanguard) has launched an ETF share class in an existing index fund."
"Having an ETF share class helps increase the tax efficiency of Vanguard open-end share classes."
"There are many exchange traded structures approved by the SEC. Each has different operations, regulatory issues, fees, and taxes."
"If you plan on making a single, large, lump-sum investment, then paying one commission to buy ETF shares makes sense. -- But if you are like most people and invest regular sums of money, you may actually spend more on commissions than you would save on ETF management fees and taxes."
"Hope over reason is the way active management is marketed to the public."
"SEC approval of actively managed equity ETFs will unleash a new wave of products."
"Thre are two types of indexes: market indexes and custom indexes. A market index is a measurement tool. A custom index is an investment strategy."
"The CFA Institute is an organization of more than 80,000 investment analysts who lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence."
"It is prudent to dig deep into the indexing methodology so that you can make an informed investment decision about the ETFs you are interested in."
"There are four methods of capitalization weighting used by index providers: full cap, free-float, constraigned, and liquidity."
"The traditional view of an index as being a passively selected and capitalization weighted basket of securities that represents a market is no longer valid."
"Rules for index construction have stretched from the simple and elegant to the complex and cumbersome."
"The important matter for ETF investors is how the index is managed and the characteristics of the index."
"Realize that stock price has nothing to do with a company's market capitalization."
"The Dow Jones Industrial Average is not used in academic studies or in economic analysis. -- It is an outdated and antiquated indicator."
"The mutual fund industry is widely known for chasing investment performance, and ETF companies are no exception."
"One way to capture fixed income exposure in your portfolio is to invest in a bond ETF that follows a broad bond market index."
"Commodities truly are a trading vehicle, not a long-term investment vehicle."
"An educated investment professional should be able to explain the differeneces between ETF types and styles, including the advantages and disadvantages of the indexes they follow."
"It is very difficult to beat the market. Few people can do it consistently enough to achieve the long-term returns needed to justify the time and expense."
"Beating the market is not just achieving a higher return. -- Risk adjusted returns are a more sophisticated approach to measuring the performance of a portfolio or fund."
"To be a successful passive investor, you need to have an unwavering belief that the strategy will work in the long-term."
"Passive investors do not attempt to time markets by forecasting economic changes or charting prices."
"Passive investors understand how difficult it is to beat the markets, and that few people actually accomplish that feat during their lifetime."
"The most important long-term decision you will make in a buy-and-hold strategy is the long-term mix between stock and bond index funds." That decision will explain a majority of portfolio risk and return over the long term."
"It is very difficult to find major asset classes that have consistently negative or low correlation with one another and are expected to deliver returns higher than the rate of inflation."
"The correlation between asset classes change, sometimes frequently and suddenly."
"During a time of crisis, the correlation between major asset classes increase, for example, global stocks."
"Building a portfolio of buy-and-hold investment in the real world requires more common sense than it does quantitative number crunching."
"If an investor wants to take more risk and explore other options, a core and explore strategy is a good compromise between passive and active management."
"If you create a core and explore portfolio, the more exploring you do, the higher the cost goes with no guarantee of higher returns."
"One 40-year-old may think that allocating 65% to stocks is aggressive while the next 40-year-old thinks allocating 80% to stocks is conservative. Only you can decide whether an allocation is too conservative or aggressive for your tastes."
"Market index portfolios are a good place to start the process of designing a mix of funds that is right for you."
"The key component for starting to accumulate wealth is savings consistency. Ideally, a young person will start a savings plan at the same time he lands his first job."
"A new investor does not know their personal tolerance for financial risk. -- Early savers should probably limit their equity allocation to 80% of their long-term investments."
"Using life cycle investing as the backbone of a lifelong investment plan provides structure and continuity to a portfolio."
"A large number of investors have the undying belief that one day they will eventually find an active method that consistently generates superior results. That is ironic since the scorecard between the active strategies and passive strategies clearly favors passive methods. It is very difficult to outperform market indexes."
"There is an old saying on Wall Street. 'The stock market has forecast ten out of the last four recessions.'"
"It is rare to find one major academic mind that believes technical patterns in stock prices reveal future price trends."
"If you decide to go the active route, be prepared to be wrong frequently, humbled regularly, and rewarded occasionally."
"ETFs are versatile. The can be optioned, shorted, hedged, and bundled into other securities."
"By creating a tax-efficient portfolio, you will pay less in taxes, which automatically increases your wealth."
"Developing and managing a nontaxable portfoliio is easier than a taxable portfolio because taxes do not get in the way of decision making."
"It is a good idea to rebalance at least annually, especially if the markets have been particularly volatile."
"If done successfully, tax loss harvesting will increase an investor's after-tax returns."
"Choosing a person or persons to take over your finances is something to do far in advance."
"There are many methods for predicting market returns, and none will be exact."
"It is not an easy task to predict inflation."
"Do not automatically reinvest dividend income (in taxable accounts). Let the income flow into your cash account."
"If you are too busy, too uninterested, too confused, or not able to keep up with your porfolio, then hiring an adviser makes sense. -- I suggest contacting the Vanguard Group and asking for a free copy of 'How to Select a Financial Advisor.'"
"Diehards.org is used by like-minded investors who are interested in keeping costs low. Not all participants are interested in ETFs, but many are knowledgeable about the subject and can pass along the names of other people who are more knowledgeable. I personally participate on the site and am available to answer questions about indexes, ETFs, and low-cost portfolio management."
Thank you Rick Ferri!
The link below is to more great excerpts in our "Collection of Investment Gems":
http://www.diehards.org/forum/viewtopic.php?t=881
Best wishes.
Taylor