Somebody notify the Bogleheads, they will like this one, or at least Jack will.? Yo, Jack, I met you over 15 years ago at a Philadelphia Financial Analysts Society meeting.
How bad are individual investors? at investing?? Bad, very bad.? But what if we limit it to a passive vehicle like the Grandaddy of all ETFs, the S&P 500 Spider [SPY]?? Should be better, right?
I remember a study done by Morningstar, where the difference between Time and Dollar-weighted returns was 3%/year on the S&P 500 open end fund for Vanguard, 1996-2006.
But here’s the result for the S&P 500 Spider, January 1993- September 2011.? Time-weighted return: 7.09%/year.? Dollar-weighted: 0.01%/yr.? Gap: 7%/yr+
Why so much worse than the open-end fund?? Easy.? Unlike the professional managers at Vanguard, and the relatively long term investors they attract, the retail short term traders of SPY trade badly; they arrive late, and leave late on average.
There is far more analysis to be done here, but to me, this confirms that Jack Bogle was right, and ETFs would be a net harm to retail investors.? The freedom to trade harms average investors, and maybe a lot of professionals as well.? It may also indicate that short-term trading as practiced by technicians may underperform in aggregate.? Not sure about that, but the conclusion is tempting.
One thing I will say: I am certain that profitable trading is not easy.? If you are tempted to trade for a living, the answer is probably don’t.
Anyway, here’s my spreadsheet on the topic:
Full disclosure: I have a few clients short SPY, hedged against my long positions.
There is an easy way to beat the S&P 500 index. Buy an index that excludes stocks of companies with terrible economics: airlines, steelmakers, auto manufacturers and perhaps utilities(constant dilution). Why would anyone buy an investment vehicle that includes airlines? Lunacy.
There was an experiment like that at the beginning of index funds, ask Mark Hulbert. They ended up trailing the index because they bounced back.
Trading stocks for a living? I do not think that i will try that anytime soon. Trading stocks for investing purposes where you do not have to keep taking money out of the pot to put food on the table and a roof over one’s head is tough enough. And what does someone do doing a really bad trading year? Eat the transaction slips?
A very long time ago, maybe 5 years, a study showed if you bought the top 5, and bottom 5 sectors, you would have generated ~60% a year. The article was in IBD i believe. There are a few caveats: the article came out before the crises and i can’t remember if it was adjusted monthly, quarterly, or annually. Regardless, it’s probably worth a test. Cheers.
Thanks, HS. Fits in with my theories in a rough way. May test it sometime, once I get a Bloomberg terminal again. 🙁