Index vs individual

Hello all, quick question and comment regarding investing in a low cost index fund/index hugging LIC vs individual/direct share holdings (yes that word again)
My question is as follows, has data shown that 80% of find managers and investors failed to beat the index due to their active approach I.e buying and selling and not buying and just continue buying?
Is the active approach an issue mainly due to the fact one would SELL at the wrong time?

 

There’s numerous reasons but the following is an important one even if one has control of behavioural aspects (a huge issue in itself):

Positive Skew and Why Active Management Under-performs Passive Strategies – North Capital

The Math Behind Futility
An overlooked statistical concept shows why it’s so hard to beat a benchmark.
Bloomberg - Are you a robot?

 

Meant to also add the following (power nap interruption) relating to active fund Mgrs vs the Index. The biggest issue is picking a consistant winner of which there are few over time. Current outperformers are in most cases tomorrow’s dogs. The only category where there is a better chance of Mgrs outperforming the index is ASX small caps. But that’s more to do with the contents of the index than Mgr brilliance. An anomaly specific to ASX compared to most other global indexes where even small cap Mgrs struggle badly against the index. It highlights that International fund Mgrs are the worst with 91% of them underperforming the index over a 15 year period.



https://us.spindices.com/documents/spiva/spiva-australia-mid-year-2018.pdf

Further I’d suggest MOST INDIVIDUAL active investors / Traders would do MUCH WORSE than the above not only due to limited skill but most importantly due to poor behavioural tendencies.

 

Active traders trade with each other and have additional costs. It is a zero sum game. So their combined average returns must be lower and the longer the time frame the greater the fee handicap.

I don't believe it comes down to selling at the right time. EMT (though not perfect) tells us all information is already priced in so it doesn't really matter what you buy you can't expect it to outperform based on the information available, you just get lucky sometimes. Unless you can somehow consistently take a better view on the available information than the 1000s of expert financial analysts. i.e. You have to think differently to the experts and be right, consistently.

 

Thanks for the reply @Hodor and @Nodrog

 

And this despite Wall St employing people such as Astrophysicists who are able to absorb, analyse and dissect huge amounts of data. Go figure.

 

Just noticed the large falls in the US after the previous days short lived euphoria over trade truce. You gotta wonder about all the trading that goes on and the futility of it all. Any wonder passive investing has become so popular.

TRADER:


VS

LONG TERM INVESTOR:


Well at least in @SatayKing ’s case.

 

Whooo! Hehe. Fella in second pic is way too overdressed so it can't be me. Grungy, paint splattered T-Shirt, un-ironed shorts, adidas about to fall to pieces is the true style of the passive income investor.

 

He he yes. I have to admit if anyone saw me wandering down the street they’d think I was doing it tough given the way I dress.

In fact much to my wife’s disgust I wore this T-shirt when shopping at Mitre 10 the other day. She made sure she wasn’t with me. Have had this T-shirt for over 25 years. You don’t want to see what under the arm pits looks like, full of holes.

 

My wife kept harping on at me to get rid of an old Kansas City Chiefs hoodie that has admittedly seen better days but is still very comfortable, warm and has more fabric than holes so in my opinion is still good to go.

She stopped nagging me about it when I eventually reminded her it was the first present she ever gave me and I would never get rid of it.

 

A lot of my shares look like that

 

Yeah, it's taking a long time for the market to recognise the true value of One-Tel.

 

Haha well played sir

 

If Active investing is a zero sum game and assuming the returns for active investors follows a normal (Gaussian) distribution aka bell curve, which is a completely valid assumption:
- half lose money
- most of those who get a positive return would be close to 0 and that slowly evaporates into a narrow tail of the super (lucky?) investors.

At the point on that curve where passive returns sit, shows how the modern portfolio theory really works.

It's possible to beat passive, but doing it consistently requires an excellent process and some luck.

 

Time's Money Magazine

But such investing leaves a little pit in my stomach. Sure, index funds are a way to get a return that’s above average for all mutual funds. But they’re boring. Make that B-O-R-I-N-G. You’ll get dividends and capital gains (or losses) almost equal to what the index produces.

As a long-time investor, I still crave a little drama and excitement.

Even though I now use index funds—in fact, Vanguard’s total stock market and S&P 500 funds are my two largest stock investments—I still like the thrill of the hunt, even though it may be costing me money.

 

Dow is not a happy camper today either! Will we see a close below 23,500 by years end who knows!

 

It would be nice if the AUD wasn’t a risk currency often negating some of the risk off market movements overseas.

 

LOL.

My partner gives me crap because i'm usually wearing gym shorts and a ripped t-shirt, even though I have really nice stuff.

I chose to dress up last couple of times we went out:

1. Call out at a nearby rental, had white shorts on, was on the ground fixing taps on a washing machine.

2. Next day we visited my parents. Walked in on dad mid-renovation, he called me over to help out. Spent the next hour saw cutting.

I looked straight at her and mouthed "THIS IS WHY I DON'T DRESS UP".

 

You put t-shirts on clothes hangers? pfffft, fancy. My floordrobe works fine.

 

Strong recovery by the Dow.
I'm so glad I'm not a trader, my fingernails would be looking depleted