DenisD wrote: ↑
05 Oct 2017 23:42
The traditional reason for buying the market was the lower cost of index funds.
Perhaps. In my case, the reason for buying the market is diversification. I believe that is the point AltaRed is making as well.
I believe that the stock market is essentially a random walk with upward drift. Some styles, or strategies will out-perform, perhaps for unexpectedly long periods of time (random events tend to cluster, after all). Then they will underperform, and other styles will become the leaders.
I suppose that if an investor is willing to follow a given style through thick and thin, sticking with it when it is underperforming and waiting for it to come back, that will give satisfactory results too. But I would find that hard to do, and I'm not sure I could ride it out. By contrast, while a widely diversified portfolio may not have higher returns, I do expect it to have less volatility than a more specific style. That helps me keep my emotions under control.
I come back to my earlier point. If a given style does particularly well for a while, investors are likely to come piling in, driving security prices up and driving total returns even higher, for a while. But that is typically followed by a period of below-average returns. Investors will flee for the next great style, prices will fall, and the cycle iterates. Sticking with the style probably will produce satisfactory results over the cycle. Changing styles to chase the next hot thing will produce underperformance, as we know from Dalbar and other studies showing the average investor doing significantly worse than market indexes. (Indexing to the market removes that temptation, at least for me.)
The plural of anecdote is NOT data.