Rick Ferri's, "The Power of Passive Investing" explains the sophisticated logic of index fund investing and provides scores of examples and tabulations that prove his point. These excerpts are full of valuable investment advice:
"Passive investors who buy the market will capture better results than most active investors who try to beat the market."
"The path to changing from an active strategy mindset to a successful passive one is based on exposure, education, understanding, belief, and commitment."
"As a group, mutual fund managers have no special talents and outperformance is more a matter of luck than skill. The academics have been saying this for years."
"Your goal as an investor is to earn the highest return feasible given the specific amount of risk chosen for a portfolio."
"Wall Street promotes the possibility of earning superior returns--not the probability."
"There are no proven methodologies that accurately predict future winning active funds."
"Attempting to earn above market returns by picking actively managed mutual funds is an inefficient use of time and money."
"Mutual funds; brokerage firms; money management companies; advisors; or what's written in most books, magazines, investment newsletters, and web sites make it seem as though everyone is winning. That's simply not true and can't be true."
"Today there are over 7,000 different distinct mutual funds including about 1,000 exchange-traded funds offered by hundreds of mutual fund companies."
"Anyone can create an all-passive portfolio using products that are low cost, tax-efficient, and hassle free."
"Investment greats such as Warren Buffett, Peter Lynch, and David Swensen are all outspoken advocates for passive investing. In addition, the U.S. government's Thrift Savings Plan (TSP) for federal employees has only passive investment options available for participants."
"Statistics show that investors lose over 1% per year by trying to shift their investment in front of the next market move."
"The truth must be repeated over and over again because lies about investing are constantly being told."
"Turnover (which costs money) in the active fund industry is about 15 times higher today than what it was in the 1960s."
"All benchmarks are indexes, but not all indexes are benchmarks."
"Alfred Cowles III dedicated his life to elevating economics into a more precise science using mathematical and statistical techniques. Cowles found that funds failed to exhibit the existence of any skill despite the presumption of investor superiority."
"Survivorship bias occurs in performance data when the entire return histories of non-surviving entities are deleted from the data-base."
"The creation of the Massachusetts Investors Trust (now MFS) in 1924 heralded the arrival of the first modern mutual fund. -- Wellington was the first mutual fund to include bonds."
" Harry Markowitz's paper was revolutionary because it explored the idea that portfolio risk is an important a part of portfolio management as portfolio return."
"Eugene Fama's work led to the formation of the efficient market hypothesis (EMH). The theory states that all known and available information is already reflected in current securities prices."
"Academics began studying mutual funds in the 1960s to discover managers who had skill. Their efforts were unsuccessful back then and new efforts remain unsuccessful today."
"In my opinion, the important question for investors is not if markets are efficient. Rather, it's a question of efficient investing, meaning creating and maintaining an efficient portfolio that has the highest probability for success."
"Michael Jensen agreed with Treynor and Sharpe that a portfolio's return should be risk-adjusted to properly measure a manager's skill."
"Active management was exposed as a loser's bet many decades ago by the academic community."
"Princeton professor Burton G. Malkiel published his own in-depth mutual fund analysis. His conclusions were similar to all the other academics who studied the data. Where was the skill?"
"John Bogle began the quest for an index fund by first doing his own number-crunching to confirm the performance numbers that others had pointed out."
"The Vanguard 500 Index Fund beat over 85% of actively managed funds during the 25 year period (1984-2009) -- even before making adjustments for terminated funds, risk factors, sales loads, and taxes."
"The S&P benchmarks outperformed the active managers in most style and size groups over most periods."
"The unexpected asset growth at Vanguard made competitors rethink their opposition to index funds."
"Any investor can create an index fund or ETF portfolio that has their desired size and value characteristics by using tools such as Morningstar X-Ray, and can do it for a fraction of the cost of active management."
"Momentum strategies typically require high turnover, and that means trading costs."
"It doesn't take any skill to buy stocks that have recently outperformed the market."
"After adjusting for beta, firm size, style, and momentum factors, Carhart concluded that an equal weighted portfolio of the mutual funds underperformed by 1.8% per year."
"Vanguard launched the first bond market index fund--Total Bond Market Index Fund which outperformed most actively managed bond funds. Within 10 years, this index fund became one of the largest bond mutual funds on the market."
"Vanguard launched the first real estate specific index fund in 1996."
"The range of returns for small cap funds is much wider than large cap funds."
"The conclusions drawn from academic studies and ongoing reports such as SPIVA make it clear that a low-cost passive approach works across every asset class."
"There is one smear on the impressive growth in index funds and ETFs. It's the invasion of active management into index fund space."
"Passive investors would be wise to avoid these (actively managed) pseudo-index funds and stay true to the lowest-cost index funds and ETFs that follow market benchmarks."
"According to Allan Roth's model, the chance that a single actively managed fund will beat a comparable index fund over any single year is 42%. The success rate drops to 30% over 5 years, 23% over 10 years, and just 12% over 25 years."
"Assume you own 10 actively managed funds. According to Roth's data, the odds of beating an all index fund portfolio are 27% over one year, 9% over five years, 6% over 10 years, and an incredibly low 1% over 25 years."
"Investing isn't about the possibility of beating the market; it's about the probability you'll meet your financial objectives by earning a fair payout for the risks you take."
"The winning active managers in one period are typically not the winning managers in the next."
"An overwhelming percentage of investors and advisors select mutual funds based almost exclusively on past performance. Their underlying assumption for relying on past results is that it has predictive value. No so."
"Mutual fund databases were plagued by survivorship bias through the mid-1990s."
"The #1 large blend fund (out of 552 L.B. funds) in 2008 finished dead last in 2009."
"Investors' love affair with last year's top funds often turns into a messy divorce just a few years later."
"Every economics student knows there's no such thing as a free lunch, especially on Wall Street. Any extra gain in one person's account means a loss in someone else's."
"The loser is the investor who believes sector rotation strategies and market timing decisions can beat the market."
"Trying to beat the market creates a huge distraction that takes your mind off the mission of building wealth."
"Wall Street and the actively managed mutual fund industry spend an inordinate amount of money flooding the airways, print media, and Internet with messages about how their active strategies will either save you from calamity or make you rich."
"Wall Street know that the more confused and off balance you are about investing, the more money they'll make."
"I wrote a beginner book entitled Serious Money. It's available for free on my web site at www.RickFerri.com.
"The Internet is another great learning tool for passive investors. A premier web site is www.Bogleheads.org.
"Speaking of the Bogleheads, you'll want to pick up a copy of The Bogleheads' Guide to Investing. There's also a follow-up book book titled "The Bogleheads' Guide to Retirement Planning."
"Ideally, the place or person where you get your advice isn't compensated to sell high fee products and services."
"Investment frauds lure in their prey by creating the illusion of safety and a high return."
"I joined the investment industry as a rookie stockbroker in 1988. -- If a client did inquire about index investing, our canned response was, "Index funds guarantee average performance. We know you can do better." That was a true statement. It is possible to do better; it's just not likely."
"Only successful investors are interviewed in the media, and only the winning mutual funds are advertised.--losers sit quietly in the background."
"The hope of beating the market sells active management, magazines, newsletters, web site subscriptions, books, and technical analysis trading programs."
"Investors who have several winning bets in a row often misinterpret luck as skill."
"An unfortunate practice that happens all too often in the advisor industry is the use of intentionally inappropriate benchmarks."
"Go to any advisor. It's almost guaranteed that the mutual funds you'll be shown had high relative returns recently. -- You'll rarely see the actual results of previously recommended portfolios."
"I finally dropped all active investing entirely and switched to a fully passive approach. That was the wisest investment decision I ever made, and one of the most calming moments I recall in my investing career."
"There'll always be years when an actively managed portfolio outperforms a passive portfolio, but the active funds won't outperform by much and not for long."
"Determine a portfolio's objective by understanding the investor's income needs, time horizon, tax situation, ability to handle risk, and unique circumstances."
"Outlining the purposes for investing before committing capital to a strategy puts the horse squarely in front of the cart."
"Individual investors generally face five big liabilities over a lifetime: education costs, home ownership, retirement fund, charitable giving, and a bequest to loved ones."
"All financial assets are priced based on their perceived risk."
"Ideally, the investments selected for a portfolio will have diversifed risks so that the correlations among these risks are not high.
"Investors should be aware of which asset classes, styles, and sectors are better placed in tax-advantaged accounts and those that are suitable for taxable accounts."
"When investment expenses are reduced and market timing mistakes are eliminated, portfolio returns must go up! It's basic arithmetic."
"Estimating the cost of future obligations is probably the most important part of investment planning because it quantifies how much money is needed."
"Human capital (our ability to earn income) is critical to our long-term financial well-being and it needs to be insured."
"Home equity can be converted into tax-free income during retirement through a revers mortgage."
"For every successful limited partnership there are at least 10 poor to mediocre ones."
"The only time market volatility creates a permanent loss in a passive portfolio is when an investor decides to sell at a loss because the markets will eventually recover."
"One method used to determine the maximum level of risk an investor can handle is to use a risk questionnaire. These tools are available for free on several web sites including Vanguard."
"All books by John Bogle and William Bernstein are excellent references."
"The biggest challenge when hiring an advisor is finding one who is truly knowledgeable about passive investing and committed to the strategy."
"At some point in your life, you may be asked to oversee the assets of a charitable foundations or endowment, or the assets of a friend, relative, client, or a persona trust set up for another reason."
"Don't rely on investment advisors for legal opinions and don't rely on trust lawyers for investment recommendations."
"There were over 2,400 cases file against ERISA (Employee Retirement Income Security Act) fiduciaries during a 44-month period. -- Most employees who are in poorly managed plans don't know their rights under ERISA."
"In my opinion, the (government) Thrift Savings Plan (TSP) is a very good model for a 401(k) plan. All the investment options are very low-cost index funds.
"Advisors come in two types: registered investment advisors (RIA) who are legal fiduciaries, and brokerage firm representatives who aren't."
"To research information about a broker or an RIA, including past grievances, go to www.SEC.gov/investor/brokers.htm.
"Calculate your future asset and liabilities, create a viable investment policy, implement your plan, diligently follow the plan, and grind out investment gains as they come."
"The royalties from this book are being donated to charitable organizations that assist wounded soldiers, sailors, Marines, and airmen. Lest we forget: freedom is not free."
Thank you Rick Ferri!
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