Indexing is fairly strait forward, you’ll have very close to market returns; whereas, active management requires a little bit of faith because, like with miracles, you must discount luck and/or coincidence to explain outcomes.

I know there are people that time markets or sector rotate with some success, but as you look at longer and longer periods of time (5, 10, 15, 20 years), the number of successful investors decreases exponentially. The same observation holds true with a large group of people repeatedly trying to guess heads or tails. That tiny minority with a good record after numerous flips could make an argument that they are skilled or have found a good system while others say its luck.

All of this aside, I think it is more important to focus on why you are investing in the first place. Is it to preserve and grow the value of your savings to use at some future time in your life? Or, are you trying to win an imaginary competition against other investors? Ask yourselves: what does a positive result form either of the above questions get me? I’m familiar with the arguments of both, so there is no need to actually answer me.

VinTek, I think if you reread my comment about dollar-cost-averaging, you will see that I do not disagree with your reply.

No technical analyst in their right mind would tell you that TA is an exact science, and it’s true there is a wide array of technical methods. And there are many many traders who use various methods who make an incredibly good living, yes, even after paying taxes. I personally know many of them, and if I mentioned the kind of percentage returns they average per year no one would believe me.

To be clear, I am not selling a method; I am selling factual market analysis information. To say my information is suspect because I have a financial interest in selling it is just ludicrous. It’s like saying that all information is suspect because the author has a financial interest in selling it!! That would include all books ever written, all newspapers, magazines, etc…hmmm

One final note, the best traders I know will tell you technical analysis is both art and science, and that the trading method is actually only a small part of what leads to success. Read some of Dr. Alexander Elder’s books and note his comments about the trading method.

You and I are using different barometers to measure our investing success/failure. You insist on using a bell curve. As long as you are doing better than other people, you are successful. How about attempting to beat the index itself? For me, the S&P 500 or the Russell 2000 are the numbers to beat. The index performance is my “C” marker. How much can I beat it by? I don’t care how many other people underperformed it!

The idea that you just can’t beat professionally trained money managers is a myth. It’s total bunk. You can do it and it’s not that hard.

Keep in mind that money managers have several disadvantages when it comes to investing that you, as an individual investor, doesn’t have to deal with.

They usually have 100s of millions or even billions of dollars to allocate, you probably have slightly less than that. That allows you to concentrate your investments down to some quality companies with the greatest chance of bubbling up. Furthermore, your returns are not diluted by being spread over so many different stocks which may be merely tracking the market averages.

They often have pension funds and other large investors that they have to answer to for taking (seemingly) unnecessary risks and/or failures. You have only yourself (and perhaps your spouse/family) to answer to when you screw up. This allows you to optimize the amount of risk you are willing to take.

Saying you just can’t beat the market is a cop-out. Go ahead, invest in the index and get your gentlemen’s “C”. I’ll send a postcard when I move to Omaha

-Toby

I appreciate your comments too. I realize that there are strong advocates of technical analysis, and that many of these advocates are smarter than me.

However, I have cast a skeptical eye at any poster who sells subscriptions to market reports. The fact that you have a financial interest in having people believe in your methods does make your information somewhat suspect.

I hardly think that having a properly diversified portfolio gives you mediocre returns. If being able to beat the 80-90% of the money managers over the long haul is mediocre, then by all means, give me mediocrity!

Here’s the problem I have with technical analysis. If it is indeed an exact science, there should be so many overwhelming success stories that even the most die-hard fundamental analysis advocate would have to concede the validity of technical analysis. And yet, even the technical analysts disagree among themselves as to which technical information yields the best results.

Also, supposing that technical analysis does indeed work. I think that the frequent trading that required by this methodology would by and large would generate taxes and fees that would offset any performance advantage yielded by the methodology. We’re talking a lot of short term capital gains here, which are taxed at the same rate as ordinary income. That’s a *big* hurdle to overcome, especially if you live in a place where there’s a state income tax in addition to the federal tax. If I had a combined marginal rate of let’s say 33%, I’d have to consistently have results 50% better than the overall market just to break even over say a total market stock fund which rarely trades. That’s a pretty tall order.

There’s tip from the Automatic Millionaire that is really good too. Every morning before starting to work on the high priority items, tackle one medium or low priority item. It’s amazing how much of a relief it is to get those things off the to do list.

I’ve read it twice, and will probably read it again

I appreciate your comments, here is my response to them

1. being invested in all sectors at all times is a great way to lose money, at best it is a mediocre approach towards investing in our opinion

2. I was NOT suggesting jumping on HOT sectors, I said people are often “in the WRONG sector at the WRONG time”, our entire work is based on being in sectors that are in the process of getting hot, not ALREADY HOT (this is often much easier to detect than people realize), and once positioned in those sectors to trail stop losses to insure profit protection …

3. I almost agree with your statement that “most people can’t do it”, I would rephrase it that “most people THINK they can’t do it”, we find that people can learn to be more targeted with their investment strategies and that this approach, although certainly not foolproof, can product outrageous returns as long as the investor exercises discipline with using profit protection and loss stops, they investor who is willing to wait 4 years to “breakeven” or “get their money back” from an investment gone bad will never get very far… what’s closer to the truth is “most people don’t have the discipline necessary for it”

This is, of course, our opinion, I respect others peoples points of view, including yours VinTek. I also realize that many people who read this blog may not agree with our opinion. We prefer to let the results speak for themselves.

Have a Great Weekend J.D. and Everybody, Cheers,
Ralph
http://blog.successfulonlinetrading.com/

The whole point of being diversified is to ensure that you’re in *all* sectors at *all* times. The whole trouble with trying to jump into hot sectors is no one actually knows how long a hot streak will last. After all, a bubble is pretty good place to invest if you can figure out where one will form, jump in when it starts, and then jump out before it bursts. Most people can’t do it.

@Dylan,

I think the point of DCAing for the average Joe is to make sure that he keeps adding to the kitty. You’re right in that studies show that investing a lump sum at any given time typically yields better results over the long term than DCAing your way in. However, most people don’t have a pile of cash sitting around. They can only make contributions with each paycheck. DCAing for these guys will ensure that they will buy fewer shares when prices are high and more shares when prices are low.

@Toby,

Hindsight is always 20/20. Yes, it’s true that the market goes through periods of slow (or even negative) and accelerated growth. The trouble is, you never really know where the top or bottom are. We’ve all seen those statistics where gains are significantly blunted if a given investor misses even a dozen days over 20-year period. And we often find that fund managers are fully invested when a bubble bursts or are sitting on a pile of cash well after a recovery begins. So if the vast majority of these these smart Ivy League-trained money managers, with all their access to information, tend to underperform the index over the long term, why do you think you can do better? And why do you think you’d merit only a “C” grade if you manage to outperform 80-90% of the fund managers out there by buying the index?

-Toby

Perhaps it’s time for me to branch out, and dip my little toe into some riskier ponds.

Great article! I’ll be pondering this list over the weekend. Thanks for sharing.

Other than that, I’m avoiding these mistakes pretty well. Which is a start.

The only point in the list I disagree with is in #7 where dollar-cost-averaging is suggested. If you do it incidentally because you are investing as you earn it, like 401(k) contributions, that’s fine. But I’m opposed to holding a chunk of cash while you slowly invest a piece at a time over several weeks or months. The illusion of any benefits of such a strategy have been disproved academically. All you are really doing is slowly changing your asset allocation from more conservative to less conservative; no benefit there and is contrary to #10 from the list.

I’m doing okay with all ten items, but this is what I do for a living. Overall it’s a great list!

Nice article, thanks. To your #7 & 8 I would add “being invested in the WRONG sector of the marketplace at the WRONG time” as well, we see people doing this all the time and they wonder why they’re not making money!

Cheers, Good Weekend,
Ralph
http://blog.successfulonlinetrading.com/

I’ve had three big tasks to take care of with my money and I have been ignoring them for just about six months now.

Perhaps it’s time to suck it up and take care of a few messy items.

CD

It’s like the parable of the three stages of enlightenment: in the first stage you don’t see the hole in the road and you fall into it. In the next stage, you see the hole but you fall into it anyway (that’s where I am right now). In the third stage, you see the hole and you walk around it.