Monday, July 30, 2018

Costs are the best single predictor of the future performance of an investment

Costs are the best single predictor of the future performance of an investment. Keep costs lower — by tracking an index rather than investing in attempts to beat it — and for any given level of risk, your returns should be a little higher.

Why investors need to know about indices.

Research by London’s Cass Business School shows that randomly chosen portfolios — that might as well have been picked by monkeys — are overwhelmingly likely to beat market-cap-weighted indices. But most monkeys failed to match equal-weighted indices, or indices based on most sophisticated measures to limit risk.

So the hierarchy is that simple equal weighting indices beat monkeys, who beat value-weighted indices like the S&P, which beats the average active manager (who nonetheless complains that the S&P benchmark is unfair).

Yet our money is still mostly run by active managers, while none that I am aware of is run by monkeys. For these reasons and much more, we need to know more about indices.
https://next.ft.com/0dfb0de0–9fc0–11e3-b6c7–00144feab7de

Mr. Markowitz’s comment on this: “One lesson from 2008 is that if it’s very complicated and you don’t understand it, maybe you shouldn’t buy it.”

Anyone with a simple rule that required them to keep 40 percent in bonds and 60 percent in stocks would have “rebalanced” — bought stocks — near the market’s nadir five years ago, he points out. “Those who were too clever by half suffered tragic