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How to Take the Emotion Out of Investing: Index!
By JLP | May 24, 2006
I’ve written about My Prudent Portfolio in the past. Recently (May 10th, to be exact) the portfolio was up over 17%. Since then, it has all been downhill as you can see from this graphic:
What a difference two weeks makes! This is a perfect example as to why it is best to not look at your portfolio on a daily basis! Why? Because it makes you “want to do something!” There is a positive in that the portfolio is still outpacing the S&P 500 Index (even if you take out a 1.05% management fee). So it isn’t all bad news.
Now, to avoid having to mess with portfolios or look at positions, one thing you can do is simply index rather than pick individual stocks. Yes, you will “give up” the ability to “beat the market.” However, you will gain the freedom of worrying about individual positions unless you just like worrying. In that case, there’s not much you can do except go for the sure thing of losing money to inflation by sticking your money in a bank account.
Topics: Investing | 8 Comments »
May 24th, 2006 at 12:51 pm
I am sooooo glad I did not own any index funds that follow the S&P 500 over the last 3-4 years. What a dud! Everything did better then this most widely held index. Not to say I have anything against indexing, but I think one can do better with semi-active portfolio management. (By semi-active, I mean responding to macro-economic indicators every 4-6 months, or 2-3 times a year.) Of course, there are plenty of indexes to choose from, whether you like minerals and natural resources or international small cap growth stocks.
May 24th, 2006 at 1:06 pm
Actually if you put your money into a high yield savings account you’re almost sure to beat inflation unless something crazy happens. But indexing all your money is simply a sure way to be average. You’re at the complete whim of the market. For better or worse.
May 24th, 2006 at 1:22 pm
Tim said:
Actually if you put your money into a high yield savings account you’re almost sure to beat inflation unless something crazy happens.
I don’t think this is true due to the impact of taxes.
May 25th, 2006 at 11:21 am
Hmm…that may be true but the portfolio you showed barely did better than a high yield savings account and you’re going to have to pay taxes on that eventually, right? The savings account has the benefit of being more stable. How many years is that annualized over?
May 25th, 2006 at 11:26 am
Tim,
Barely? I wouldn’t say 2% more (after fees) is barely beating a high-yeild account. Over the long run, that 2% difference could mean hundreds of thousands of more dollars in the account.
The portfolio I showed is not even a year old yet. Its anniversary date is June 13. Over the long-run I would much rather be in stocks than in a high-yeild account.
May 25th, 2006 at 4:54 pm
Beat by 2% more is relatively significant. 2% out of 8% is 25% better, or any other way that you want to calculate it. I actually would say that putting money in a high-yield account in the long term is guaranteed to lose money to inflation (& tax). Doing investing may not always work out, but at least you have a chance.
May 26th, 2006 at 4:37 am
Oh dang, I looked at the 4.72% number for the S&P! Not the 8.04%…my bad. You’re right then your portfolio is doing pretty well. [goes to corner, puts on dunce cap]
May 27th, 2006 at 11:43 pm
[...] JLP from AllFinancialMatters looks to index investing for taking the emotion out of investing. [...]