Lean To The Index

As repeat visitors to this blog will know, I like to keep an eye on the more traditional financial markets as well as the sports markets, and although I long ago realised that I had no edge in stocks, options, futures or commodities markets, stashing money away “every pay day in a few diverse index funds and forget about it” is as solid investment advice as most of us ever need, and I only wish I had heeded that advice in my twenties rather than my thirties. The “forget about it part” isn’t that easy though.

Although it’s completely pointless, I am in the habit of checking in on the markets at least daily, on good days perhaps several times. However, as stock prices fall on roughly 50% of days, this means that half the time you are likely to feel bad. The general upward trend of the market means that by checking less frequently, you get bad news less often – about 38% of the time if you check on a monthly basis, and 28% if you check annually.

I say it’s a pointless exercise to check daily, but even more than that, it can distract you from making smart long-term decisions. By the time you hear about important news, it’s not news.

I do like to look at some of the finance pages though, taking much of the content with a grain of salt. Lots of articles with dramatic headlines, and lots with question marks in them.

On a typical day, (yesterday), there were links to articles with the titles “Are Stocks Getting Into Dangerous Territory?”, “How Long Can Stocks Maintain All-Time Highs?”, “Cramer - Prepare For Stock Declines”, and “Is a Stock Market Correction Overdue?” – all very bearish in tone, if lacking any real substance, and then a ray of sunshine with an article titled “These are the most obvious signs the market is heading higher”. Peter Nordsted himself couldn’t do a better job of hedging his bets.

The fact is that no one knows. By definition, some managed funds will beat the average one year, and some of those will beat it a second year. Fewer still will beat the average in years three and on, unless of course they have some kind of an edge, which would be illegal, and no one does anything illegal.

One of the authors of Freakonomics, Stephen Dubner, says:

“No one is really good at predicting the future. Investors tend to get overconfident about the market, but no one is really good at predicting the future—including the experts. We tend to believe more in ourselves than we should," he said. "We all think that we can do better than average and that can be a trap. You gotta play it smart, you gotta lean to the index when you feel you need to and then depend on really smart guys … if they are indeed much smarter."

I don’t agree that we do all think we can do better than average when it comes to traditional financial investments. That seems a little unrealistic, and really smart guys tend to be really average guys who had a really luck spell.

It's not the first time Dubner has warned about stock-picking advice. Last month he said:

"If you look at stock-picking advice, you find that the experts … are generally about as good as monkey with a dartboard."