What is the single most important investing belief?

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plnelson
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Re: What is the single most important investing belief?

Post by plnelson » Mon Jan 09, 2012 9:37 am

GregLee wrote:
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.
Yes, but EMH says that the lower price is compensated for by the higher risk.

Look at it this way. Suppose we have 2 asset classes, A and B. B has a higher risk than A so it is priced lower. I claim that the lower price is exactly compensated-for by the higher risk so there's no net advantage.

But let's suppose that I am initially wrong, let's suppose that B is priced 20% lower but only had 10% higher risk. If that were the case then a mutual fund could exist that could consistently "beat" A by just investing in assets of class B. As the (efficient) markets "digested" this information then demand for B would increase, driving up its price until it no longer had an advantage.

As I said above, if there really was a risk premium greater than the risk itself (e.g., a 20% premium for a 10% risk) then it would be possible to create a mutual fund that, over the long run would beat broad market indices. But this is not the case empirically, which is why we're on Bogleheads.

That's why I say the single most important investing belief is that you cannot predict the future movement of markets, because that would violate EMH.

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bob90245
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Re: What is the single most important investing belief?

Post by bob90245 » Mon Jan 09, 2012 11:32 am

plnelson wrote:
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?
Managed funds are a separate discussion. If you know who the next star manager like Bill Miller before he posts 15 years of outstanding returns before he crashes, then more power to you.

But then again, it sounds like you think the Boglehead approach is founded on predicting the short term ups and downs of the market. That is not true.

As for me, I'm an agnostic. I have no idea whether bonds will beat stocks or stocks will beat bonds. My philosopy is more in line with Nobel Prize winners.
I once asked Harry Markowitz, who shared the Nobel Prize in economics in 1990 for his mathematical explorations of the relationship between risk and return, how he diversified his portfolio.

Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article "Portfolio Selection" in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn't what he did: "Instead, I visualized my grief if the stock market went way up and I wasn't in it -- or if it went way down and I was completely in it. My intention was to minimize my future regret."

Dr. Markowitz paused, then added wryly: "So I split my contributions 50/50 between bonds and equities."
Source: http://online.wsj.com/article/SB123093692433550093.html
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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thatwhichisgood
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Re: What is the single most important investing belief?

Post by thatwhichisgood » Mon Jan 09, 2012 12:11 pm

Pay yourself first. :D

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Re: What is the single most important investing belief?

Post by reggiesimpson » Mon Jan 09, 2012 12:17 pm

And this is why i came to this site months ago. Relevant statements and commonsense questions with concomitant relevant statements and commonsense answers. Thank you all. I have nothing to add other than......... I agree.

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Re: What is the single most important investing belief?

Post by plnelson » Mon Jan 09, 2012 2:30 pm

bob90245 wrote:
plnelson wrote: 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?
Managed funds are a separate discussion. If you know who the next star manager like Bill Miller before he posts 15 years of outstanding returns before he crashes, then more power to you.

But then again, it sounds like you think the Boglehead approach is founded on predicting the short term ups and downs of the market. That is not true.
What did I say from which you drew THAT conclusion? I think the future is totally unknowable and that's also what Bogleheads believe.

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Re: What is the single most important investing belief?

Post by 555 » Mon Jan 09, 2012 4:02 pm

plnelson wrote:What did I say from which you drew THAT conclusion? I think the future is totally unknowable and that's also what Bogleheads believe.
Okay, where shall I start?

Do you believe the sun will come up tomorrow?

Do you see where I'm going with this?

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bob90245
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Re: What is the single most important investing belief?

Post by bob90245 » Mon Jan 09, 2012 4:21 pm

plnelson wrote:I think the future is totally unknowable and that's also what Bogleheads believe.
Where do you think "Age in Bonds" comes from if not from a belief that stocks will likely outperform over the long term?
A good guideline is to hold your age in bonds. When you are younger, you have your prime earning years ahead of you, and you have decades before you need to access the money. So, a big drop in stock prices will not hurt you, as long as it doesn't cause you to flee the market. As you age, you can afford to take less and less risk.
Source: Bogleheads® investment philosophy

On the other hand if someone had no clue whether stocks would beat bonds or bonds would beat stocks over the long term, then they follow an alternative approach and cover both "bets" putting half in stocks and half in bonds.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

SP-diceman
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Re: What is the single most important investing belief?

Post by SP-diceman » Tue Jan 10, 2012 12:33 am

555 wrote:
plnelson wrote:What did I say from which you drew THAT conclusion? I think the future is totally unknowable and that's also what Bogleheads believe.
Okay, where shall I start?
Do you believe the sun will come up tomorrow?
My magic eight ball says: “Maybe.”
I’m just trying to figure out if that’s a prediction or logical assumption? :)



Thanks
SP-diceman

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Re: What is the single most important investing belief?

Post by Namit Nasih » Tue Jan 10, 2012 4:46 am

"Risk comes from not knowing what you are doing." - WB

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Re: What is the single most important investing belief?

Post by rotorhead » Tue Jan 10, 2012 7:38 am

Re: What is the single most important investing belief?

Postby Midpack » Thu Jan 05, 2012 11:20 am

umfundi wrote:Invest in TIPS! Dollar-Cost Average! What to do about the Euro crisis? Will Social Security disappear? Well, by all means, understand these issues, but there is nothing special you, as an individual can or should do. Recognize that each presumed crisis / opportunity rests on some prediction or assumption on the direction of future events. All those risks are accounted for in current prices. The best, most optimum thing you can do is spread your bets.

Keith


I pretty much agree with the OP, and I think the underlined may be the most overlooked aspect of investing. I've done (slightly) better than average after expenses as a long time Bernstein/Bogle follower, as expected. Too many people come to me and just want me to tell them what to buy, they don't want to 'understand the issues.' And when the market takes the inevitable periodic dive, they panic and sell, so I never make any recommendations, not even to family.

Having the ability to not lose your head during market and/or economic excursions is key, and IMO that only comes from understanding market history, asset classes & allocation, etc. I know exactly why I own every fund and why my chosen AA, and no one should do otherwise IMO, but most aren't interested in knowing 'why.' So when funds/classes rise and fall I'm not usually (overly) surprised and I can sleep at night. I've ridden out '87, '00 (not a surprise at the time) and '08 - maybe a little discouraged, but I never sold out, in fact I bought in. This comes from understanding, The Four Pillars of Investing by Bernstein is one of several books that I think can provide the necessary knowlege. There are far too many other flashy 'get rich quick' books that will lead investors astray IMO.

I think the discussions here no matter how far fetched they may seem at times, are instructive and worthwhile in that they test our knowledge and thereby strengthen our understanding. The more I know, the better I sleep and just live life. And I hope I will always continue to learn. YMMV
Terrific post in a terrific thread. I am going to print it and tape it to the wall by my computer screen. I have not done too badly in previous years, but have been reading this forum for about 3 years; and transitioned to a Boglehead portfolio 2 years ago - 65/35 stocks/bonds (including TIPS). 2011 was unsettling to say the least - up 8% at end of April, then down; and up again in July. Then down 6% in October, finishing the year at -0.89%. All in all not bad thanks to the bonds. Not easy to sit and watch though; and I've had the itch since year end to "do something" to improve my portfolio. Been studying it a lot; and have come to the conclusion that my allocation is good, and funds are sound; and I will do nothing as Taylor has suggested repeatedly.

Thank all you Bogleheads for helping me "stay the course".

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Re: Most Important Belief? Mr. Bogle's answer.

Post by umfundi » Sun Jan 22, 2012 4:36 pm

Taylor Larimore wrote: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
Taylor,

I am now coming to understand that staying the course is possibly the most difficult thing one should do. It's very hard to do, and it's very hard to understand why.

I am reminded of Rudyard Kipling's poem, "If"
http://www.kipling.org.uk/poems_if.htm

Keith
Déjà Vu is not a prediction

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nisiprius
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Re: What is the single most important investing belief?

Post by nisiprius » Sun Jan 22, 2012 8:01 pm

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".
The problem is, in a store you know that the items on sale are identical to the same items that were priced higher last week, so you can be sure they are a better buy today. The price is set by the store manager, not by store customers in an auction.

In investments, the concept of "on sale" is meaningless and misleading, because it is not a case where a manager decides today to offer you a lower price on same item she priced higher yesterday. It's an auction price in a busy market, and the only reason the price is lower is because the market thinks it is not the same item that it was yesterday, it is distressed merchandise. You are not comparing yesterday's $2.50 can of soup to today's $1.25 can of soup. It is day-old bread, short-dated chicken, shopworn goods. You are comparing yesterday's fresh bread to today's day-old bread. The fact that it costs less doesn't automatically make it a better buy.

To believe that an asset that has dropped in price must automatically be a better buy is to disbelieve in the market.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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baw703916
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Re: What is the single most important investing belief?

Post by baw703916 » Sun Jan 22, 2012 8:41 pm

The market will eventually give good returns, and you just have to stick to your plan until that happens.
Most of my posts assume no behavioral errors.

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Taylor Larimore
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"If"

Post by Taylor Larimore » Sun Jan 22, 2012 8:53 pm

Keith:
I am reminded of Rudyard Kipling's poem, "If."

http://www.kipling.org.uk/poems_if.htm
This great poem reminds me of our mentor, Jack Bogle.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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GregLee
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Re: What is the single most important investing belief?

Post by GregLee » Sun Jan 22, 2012 9:11 pm

nisiprius wrote:The problem is, in a store you know that the items on sale are identical to the same items that were priced higher last week, so you can be sure they are a better buy today. ... You are not comparing yesterday's $2.50 can of soup to today's $1.25 can of soup. It is day-old bread, short-dated chicken, shopworn goods. You are comparing yesterday's fresh bread to today's day-old bread.
I wonder if I'm following this. You're saying that yesterday's $2.50 fresh bread is identical to today's $1.25 day-old bread, so it's sure to be a better buy?
Greg, retired 8/10.

sscritic
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Re: What is the single most important investing belief?

Post by sscritic » Sun Jan 22, 2012 9:12 pm

I know less than I think I know.

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GregLee
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Re: What is the single most important investing belief?

Post by GregLee » Sun Jan 22, 2012 9:19 pm

sscritic wrote:I know less than I think I know.
That's not necessarily saying very much!
Greg, retired 8/10.

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Re: What is the single most important investing belief?

Post by umfundi » Sun Jan 22, 2012 10:50 pm

sscritic wrote:I know less than I think I know.
Or, as someone said, you may think
You know what you know, and
You know what you don't know.
But also,
You don't know what you don't know. :wink:

Keith
Déjà Vu is not a prediction

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Re: What is the single most important investing belief?

Post by vesalius » Tue Jan 24, 2012 6:45 am

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.
This line of thought is first on my list as well.

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Re: What is the single most important investing belief?

Post by Trebor » Tue Jan 24, 2012 9:57 am

"What matters most is the amount of money that is put away."

I don’t view it as “saving.” I view it as “buying” independence and freedom. This mental shift has worked well for me.

“Stay the course” “Discipline”

Only time will tell how well this works out for me. Discipline requires having knowledge that your plan is sufficient. With knowledge, any potential future regret is minimized. Even if things do not work out, I know I have not acted in a completely foolish manner. Whether it works out well or not, I have acted in a reasoned and prudent way. I credit the Bogleheads for giving me that knowledge and comfort.
TINSTAAFL

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Re: What is the single most important investing belief?

Post by muhtar1938 » Tue Jan 24, 2012 11:12 am

I have to relate a true story that sounds like one of those "white lies" in solicitations for various newsletters whose guru turned a pittance into millions. In the early 80s with two young kids and a salary that found me living paycheck to paycheck, even calling up the gas company to see if my estimated bill could be reduced by $2.00, I made one of my frequent visits to one of the elite "department stores" I visited: Good Will. The other was the Salvation Army where I was on a first-name basis.

Looking over the books, I saw one by Bernard Malkiel. I can't recall the exact title, but it was something like INVESTING IN THE 1980s. I had to break a dollar and pay twenty-five cents for it. At the time I didn't know the difference between a stock and a bond. In fact, the whole area of investing was a mystery to me. The book was a short one, and I read it as slowly as it was short, looking up financial terms and re-reading many portions.

I followed everything Malkiel said. I even put aside $20 a month (automatic deduction) into my two girls' mutual fund accounts, choosing funds that Malkiel recommended. Well, by the time they were teenagers, there was enough for them to buy cars when they got their licenses! Also, with the help of subsequent books and Mr. Boogle, I followed a lot of the advice I read today in this post. Saving a bit over 20% of my income, I wound up part of the 2% of 401k owners in terms of savings.

I will never forget the power that twenty-five cents and Bernard Malkiel wielded in my life. So much so that I can visually recall the scene in the Good Will store, when I pulled this slim volume from the shelves of used books and began my investing education. Luck favors the uninformed Good Will shopper who is willing to fill a gap in his knowledge and tackle a vocabulary that, at the time, seemed like an Eastern European language written in Cyrillic script.

That was the beginning of many economic habits, primary among them is grazing on a regular basis on this site, absorbing more and more good information from the multitude of "Bernard Malkiels" who past here.

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Taylor Larimore
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Re: What is the single most important investing belief?

Post by Taylor Larimore » Tue Jan 24, 2012 12:47 pm

Hi Muhtar:

Like you, it was an early edition of Professor Malkiel's, Random Walk Down Wall Street, that started me on the road to investment success. It was Jack Bogle that kept us on that road to what has become a financial carefree retirement.

My wife and I will never be able thank these two men enough.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: What is the single most important investing belief?

Post by sschullo » Tue Jan 24, 2012 12:53 pm

vesalius wrote:
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.
This line of thought is first on my list as well.
And during bad economic times put money away, and during good economic times, put more money away, instead of purchasing that new car.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: What is the single most important investing belief?

Post by muhtar1938 » Thu Jan 26, 2012 9:37 am

Dear Taylor:

Thanks for your reply. We both share that gratitude you mentioned. I almost wish the investing I've done was terribly complicated, but with Malkiel and Bogle looking over our shoulders, it just wasn't. I always tell friends that the last thing they want to do is to let investing become a time-consuming aspect of their lives. For me, the only value that money has is how it allows me to live an enjoyable life, how it gave me the gift of time to keep discovering and growing rather than surviving. And, I should mention, the opportunity to be generous and give back in all the ways that present themselves to us after the meal, the car wash . . . . We few, we lucky few, who came upon these brilliant men who shared their financial insight with us.

Cheers,
Muhtar

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kenyan
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Re: What is the single most important investing belief?

Post by kenyan » Thu Jan 26, 2012 11:07 am

I think that there *are* people who can recognize and capitalize on the inefficiencies in the market. Maybe not all the time, but some of the time. However, who would I bet on being successful at this - the guy who spends 40-80 hours a week doing it and has huge resources (contacts, information, time, computers, capital) at his disposal, or me?
Retirement investing is a marathon.

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Re: What is the single most important investing belief?

Post by Clearly_Irrational » Thu Jan 26, 2012 4:55 pm

Spend less than you earn, invest the difference.

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Re: What is the single most important investing belief?

Post by plnelson » Thu Jan 26, 2012 10:38 pm

555 wrote:
plnelson wrote:What did I say from which you drew THAT conclusion? I think the future is totally unknowable and that's also what Bogleheads believe.
Okay, where shall I start?

Do you believe the sun will come up tomorrow?

Do you see where I'm going with this?
Not really.

The reason why we think the sun will come up tomorrow morning is not because it always has - it's because there are laws of physics, in particular, laws of planetary motion, to predict this.

There are no known scientific bases to assume that stocks will outperform bonds, or that markets, in general will go up. If we are to be intellectually honest we must, perforce, assume that the future is unknowable both with regard to the direction of markets and to the relative performance of different asset-classes. Intellectual honesty requires that we acknowledge the unpredictability of the future as the foundation of any investment scheme.

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Re: What is the single most important investing belief?

Post by GregLee » Fri Jan 27, 2012 1:52 am

plnelson wrote: The reason why we think the sun will come up tomorrow morning is not because it always has - it's because there are laws of physics, in particular, laws of planetary motion, to predict this.
That's not true, but it's interesting. I think perhaps you're making an unwarranted distinction between rules of thumb and laws of physics. They differ only in sophistication and degree of reliability.
Greg, retired 8/10.

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Re: What is the single most important investing belief?

Post by Sunny Sarkar » Fri Jan 27, 2012 2:30 am

Lee Trevino (golfer) wrote:One day in 1984 my wife, Claudia, told me, 'The government gets a third and we can spend a third, but we need to save a third'. That's the smartest advice anyone ever gave me. We're rich now.
:sharebeer
"Cost matters". "Stay the course". "Press on, regardless". ― John C. Bogle

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