Financial Advisors

[meditate89]

[ QUOTE ]

if we are talking about strictly passive investments:

1) market timing is not optimal

2) dollar cost averaging is not optimal


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I really don't agree with this- it's just too broad of a statement. It really just depends too much on the investors skill level / objectives. If you mean solely index funds when you say 'passive investments', then I agree with you to a much much greater extent than I originally anticipated- but I see most of the equity purchases I make as passive investments- I'm going to hold them for a very very long time

I would argue that market timing is very important for anyone looking to maximize their returns... Put quite simply, the cheaper the price you pay, the higher your return will be.

Would you rather buy to hold for the next 20 yrs after a 20% increase in equity prices or a 20% decrease in equity prices?

While I'm not going to sit here and tell you I can time or predict the market with any certainty, I can certainly be very patient and wait for a good pitch. I can't really tell you if an index fund is a good pitch, but I could probably figure out if McDonald's was a good pitch.

In fact, there's tons of good buys out there at this very moment.

Make a list of companies you'd be happy to own; check up on them once in a while to see if they're on sale enough to buy- it might take you a while- but probably not in this market.

As for DCA-
I bought a company that represented about 5-10% of my portfolio. I really like the company, and I believe it was trading at a small discount to intrinsic value. This company went down about 15-20% in price. At this time I believed it to be significantly undervalued and acted accordingly; it went up to about 35-40% of my portfolio, mostly through adding new money.

For passive investments you want to DCA on the way down (A more technical approach may only want DCA on the way up!)

So while I'm not going to try to time the buying of an index fund, since they will go up in the long run and I don't want to miss one of the best performing days of the year by not being invested, nor am I going to average into an index fund for similar reasons, I think there are many passive investment opportunities in individual stocks and I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment

[DcifrThs]

[ QUOTE ]
[ QUOTE ]

if we are talking about strictly passive investments:

1) market timing is not optimal

2) dollar cost averaging is not optimal


[/ QUOTE ]

I really don't agree with this- it's just too broad of a statement. It really just depends too much on the investors skill level / objectives. If you mean solely index funds when you say 'passive investments', then I agree with you to a much much greater extent than I originally anticipated- but I see most of the equity purchases I make as passive investments- I'm going to hold them for a very very long time

I would argue that market timing is very important for anyone looking to maximize their returns... Put quite simply, the cheaper the price you pay, the higher your return will be.

Would you rather buy to hold for the next 20 yrs after a 20% increase in equity prices or a 20% decrease in equity prices?

While I'm not going to sit here and tell you I can time or predict the market with any certainty, I can certainly be very patient and wait for a good pitch. I can't really tell you if an index fund is a good pitch, but I could probably figure out if McDonald's was a good pitch.

In fact, there's tons of good buys out there at this very moment.

Make a list of companies you'd be happy to own; check up on them once in a while to see if they're on sale enough to buy- it might take you a while- but probably not in this market.

As for DCA-
I bought a company that represented about 5-10% of my portfolio. I really like the company, and I believe it was trading at a small discount to intrinsic value. This company went down about 15-20% in price. At this time I believed it to be significantly undervalued and acted accordingly; it went up to about 35-40% of my portfolio, mostly through adding new money.

For passive investments you want to DCA on the way down (A more technical approach may only want DCA on the way up!)

So while I'm not going to try to time the buying of an index fund, since they will go up in the long run and I don't want to miss one of the best performing days of the year by not being invested, nor am I going to average into an index fund for similar reasons, I think there are many passive investment opportunities in individual stocks and I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment

[/ QUOTE ]

this is precisely why i broke it up into two sections.

again, this is my opinion and others can vary, but some of the sharpest minds in finance theory out there today agree (i.e. i share their opinions not the other way around).

DCA and market timing have no place in passive investing. anytime you make a decision like "oh, this looks more valuable today than it did yesterday" or "i think i'll wait to purchase this in 2 weeks since i think i can get a better price" or "the market tumbled today, i see some good value stocks i'd like to buy and hold for al ong time that didn't look attractive yesterday" you've implicitly made an active decision and have strayed from imo strictly passive decision making. this is regardless of your investment horizon. people oftentimes (from what i've seen) mistake investment horizon for active vs. passive allocation. this is a more controversial genearl statement since portfolio efficiency can mandate different allocations based on an investment horizon and risk tolerance, but in general, if you choose one thing over another and then hold it for 50 years, you've still made the active decision to purchase it and are thus "active"ly investing imo and not "passively" investing.

to me this seems extremely logical and intuitive but i guess it has been ingrained for so long that "holding an investment for a long time" just automatically relates to "passive investing" despite the fact that the decision to hold that security vs. another one is an active decision. "

a clear example of this fallacy is when you say :

[ QUOTE ]
I think largest returns will be produced by buying troubled / out of favor / beaten down / small / undetected companies and holding them as a passive investment


[/ QUOTE ]

this is an active decision. you are choosing which companies to purchase. this requires information and a filtration of that information such that you make a decision to hold certain stocks. just because your time frame is large, doesn't mean you're investing passively. passively imo implies NOT make decisions and simply collecting risk premia from broad asset classes.

we've had this debate on this forum before and i always seem to be the lone voice saying this but again, it just seems so obvious to me that i often find myself shocked to hear people get so up-ended about it.

i dunno, i can be wrong, but i have yet to hear a convincing argument.

Barron