Professor Is Wary of 'Exciting' Investments and Suggests Mutual Funds to Buy - WSJ.com

Professor Is Wary of 'Exciting' Investments and Suggests Mutual Funds to Buy - WSJ.com:

A very good article and interview with FinanceProfessor David Snowball who runs MutualFundObserver.

Two look-ins:

"There's a concept called the loser's game, and in the loser's game the winner is the person who makes the fewest mistakes.

If you ever go and play tennis with one of your neighbors, in all likelihood you are both pretty bad. The person who wins these matches isn't the person with the greater skills but the person who does the smaller number of stupid things.

The same is true when you are your own small investor: You are your biggest enemy. You are going to have the opportunity to hurt yourself badly. You need to minimize the size and impact of the mistakes that you will inevitably make."

and

"WSJ: How should ordinary investors pick funds?

Mr. Snowball: Investors like stories. But for most people, the best thing they can do is to find a boring investment. Find something that does not excite them at all. A balanced fund or a life-cycle fund that is offered with reasonable expenses and a good management team. They are so dull they are not even fun to write about, but year after year they produce what they promise."

So go bore yourself! Your portfolio will most likely be glad you did!


BTW if you are interested in Mutual Funds, I recommend reading this by John Bogle.

Related articles

• The benefits of mutual funds (christianpf.com)
• Investing 101: The Difference Between Mutual Funds and ETFs (wire.kapitall.com)

Hedge funds and performance

Given all the attention hedge funds have been getting over the past few years, it is good to be reminded occasionally that when measured against a proper benchmark most hedge funds do NOT outperform. The following is from Ramit Sethi writing at Iwillteachyoutoberich.

I Will Teach You To Be Rich » Behind-the-scenes New Yorker article on hedge funds reveals they aren’t so sexy:

"...people with access to hedge funds — even they may be getting substandard returns in exchange for their participation in hedge funds. This is just another example of investor psychology and the importance of realizing that people are not always rational with their investments."

Sethi also cites Malkiel and Saha:

"After examining results of now defunct firms, Malkiel and Saha found that between 1996 and 2003 hedge funds made an average return of 9.32 per cent, significantly less than the 13.74-per-cent average return of funds included in the published databases."

Defnitely a good reminder and definitely not what you would expect if you just listened to popular press.

Not academic and not even that good but it is interesting to read and the conclusion is pretty good: i.e. passive and automatic investing wins out in the end!

From FoxNews

Short version: Quantitative analysis, which limits impact of behavioral finance's impact, is catching on and indexing seems to be better way to go than stock picking (nothing new with that!)

Two look-ins:

"Behavioral Finance, the new science of irrationality, [is] also known as behavioral economics, quant-trading, neuro-investing, etc.

later:

"Behavioral finance is going through a major transition that will impact the future of investing worldwide. The old behavioral finance has been around for several decades, dominated by psychologists studying irrational human behavior. Recently a newer, more secretive and potentially dangerous version has emerged. Psychologists are being sidelined by mathematicians speaking a language as foreign to Main Street investors as ancient Mayan without subtitles."

and later:

" What can you do? Very simple: Since you can't beat them, don't play their game by their rules. Build a lazy portfolio. Then leave it alone. Let it do its job automatically. Build wealth doing something you love in a business or profession you enjoy, and spend as much time as you can with family and friends."

In fact, even if you might be able to beat them" this is good advice!