What are the arguments against index investing?

I have been using QQQ / Nasdaq 100 for years. It holds ( and has held for the last 2 decades ) many of the top growth stocks. I was a stock picker and index futures trader ( used NYF contracts in the 90's ) from 1987 - 2001 and did pretty well. Yet the analysis / screen time was burdensome. The QQQ alleviated the need to "select" a portfolio of stocks. I also migrated to / invented a tactical asset allocation model which has much longer holding periods and utilizes geometric compounding more effectively than "short term" trading.
Another simple, "active", low frequency index strategy that has produced risk adjusted alpha, involves the use of a 10 month moving average:

Tactical 10 month simple moving average process crossover signals:
  1. Buy NDX ( Nasdaq 100 / QQQ ) when price of S&P 500 index crosses above 10 period moving average of S&P 500 ( monthly closing basis )
  2. Sell NDX when price of SP 500 crosses below 10 period moving average
  3. When in “Sell”, buy Long Bond ( VUSTX ) when price of VUSTX rises > 10 period moving average ( monthly basis ) of VUSTX
Sell VUSTX position when : a) VUSTX price falls < 10 period SMA or b) price of S&P 500 rises > 10 period SMA of S&P 500 ( buy NDX / QQQ )

All other periods outside of VUSTX signals are in cash

VUSTX = Vanguard Long Term Treasury Fund

CAGRs 1985 - 2015 switch 14.2% Buy and Hold NDX 12.5%
2002 - 2015 switch 13.7% B & H 8.2%
2008 - 2015 switch 15.5% B & H 11.6%

Another index that is worthy of including in a portfolio is a small cap value index ( Vanguard Small cap value VBR is a decent one ) as small cap value has proved the highest decile returns of every stock universe over a 90 year period ( except for emerging small cap value ).
 
Stockmarketmap said:
I have been using QQQ / Nasdaq 100 for years. It holds ( and has held for the last 2 decades ) many of the top growth stocks. I was a stock picker and index futures trader ( used NYF contracts in the 90's ) from 1987 - 2001 and did pretty well. Yet the analysis / screen time was burdensome. The QQQ alleviated the need to "select" a portfolio of stocks. I also migrated to / invented a tactical asset allocation model which has much longer holding periods and utilizes geometric compounding more effectively than "short term" trading.
Another simple, "active", low frequency index strategy that has produced risk adjusted alpha, involves the use of a 10 month moving average:

Tactical 10 month simple moving average process crossover signals:
  1. Buy NDX ( Nasdaq 100 / QQQ ) when price of S&P 500 index crosses above 10 period moving average of S&P 500 ( monthly closing basis )
  2. Sell NDX when price of SP 500 crosses below 10 period moving average
  3. When in “Sell”, buy Long Bond ( VUSTX ) when price of VUSTX rises > 10 period moving average ( monthly basis ) of VUSTX
Sell VUSTX position when : a) VUSTX price falls < 10 period SMA or b) price of S&P 500 rises > 10 period SMA of S&P 500 ( buy NDX / QQQ )

All other periods outside of VUSTX signals are in cash

VUSTX = Vanguard Long Term Treasury Fund

CAGRs 1985 - 2015 switch 14.2% Buy and Hold NDX 12.5%
2002 - 2015 switch 13.7% B & H 8.2%
2008 - 2015 switch 15.5% B & H 11.6%

Another index that is worthy of including in a portfolio is a small cap value index ( Vanguard Small cap value VBR is a decent one ) as small cap value has proved the highest decile returns of every stock universe over a 90 year period ( except for emerging small cap value ).


James
stockmarketmap.wordpress.com
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yes, I agree. What happened to all the arguments against indexes?
 
Stockmarketmap said:
I have been using QQQ / Nasdaq 100 for years. It holds ( and has held for the last 2 decades ) many of the top growth stocks. I was a stock picker and index futures trader ( used NYF contracts in the 90's ) from 1987 - 2001 and did pretty well. Yet the analysis / screen time was burdensome. The QQQ alleviated the need to "select" a portfolio of stocks. I also migrated to / invented a tactical asset allocation model which has much longer holding periods and utilizes geometric compounding more effectively than "short term" trading.
Another simple, "active", low frequency index strategy that has produced risk adjusted alpha, involves the use of a 10 month moving average:

Tactical 10 month simple moving average process crossover signals:
  1. Buy NDX ( Nasdaq 100 / QQQ ) when price of S&P 500 index crosses above 10 period moving average of S&P 500 ( monthly closing basis )
  2. Sell NDX when price of SP 500 crosses below 10 period moving average
  3. When in “Sell”, buy Long Bond ( VUSTX ) when price of VUSTX rises > 10 period moving average ( monthly basis ) of VUSTX
Sell VUSTX position when : a) VUSTX price falls < 10 period SMA or b) price of S&P 500 rises > 10 period SMA of S&P 500 ( buy NDX / QQQ )

All other periods outside of VUSTX signals are in cash

VUSTX = Vanguard Long Term Treasury Fund

CAGRs 1985 - 2015 switch 14.2% Buy and Hold NDX 12.5%
2002 - 2015 switch 13.7% B & H 8.2%
2008 - 2015 switch 15.5% B & H 11.6%

Another index that is worthy of including in a portfolio is a small cap value index ( Vanguard Small cap value VBR is a decent one ) as small cap value has proved the highest decile returns of every stock universe over a 90 year period ( except for emerging small cap value ).


James
stockmarketmap.wordpress.com
More...
In other words, you can get a higher return by investing in index funds only for many and many years?
 
Jamie J. said:
In other words, you can get a higher return by investing in index funds only for many and many years?
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It's not a matter of trying to get a higher return. It's a matter of getting an average return. Yes, it takes a few years of index investing to burn off the costs of trading, management fees, spreads, commish and cap gains.

In any given year, 15% will outperform your index. Think about that one for a while. If you were a betting man (and I know you are because you are on this site) would you (long term, like if it was for your retirement or you newborns college education) bet on the 15% who will outperform (even though they are different each year) or the 85% who will underperform?

or the index?

at anyrate, once you get your index thing down, it becomes a matter of asset allocation, so out of the fire into the frying pan.
 
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Michael J. Fletcher said:
Indexes suck, really,

You have a point, I don't like indexes too, 'cause they don't give you a real freedom of choice, though it's better than buying actively managed mutual funds.In a nutshell it all depends on your strategy, and time what you want to spend. Index funds are great for those, who don't want to spend their lives at the monitor while trading.
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You must be young and invest a lot of your time on trading. If you can make a decent hourly return on your time doing this, without risking a black swan event, well, good for you. The majority of traders mess up or spin their wheels too much when they could make a better wage doing something else.
 
Nine_Ender said:
You must be young and invest a lot of your time on trading. If you can make a decent hourly return on your time doing this, without risking a black swan event, well, good for you. The majority of traders mess up or spin their wheels too much when they could make a better wage doing something else.
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traders aren't trying to make a wage, if we wanted to do that we could just get a job
 
What are the arguments against index investing?
There are many ways one could answer this query. I will offer my own perspective.

It depends on (1) what your objectives are, (2) how much effort you can apply, (3) your own set of capabilities.

I am a rather successful trader. I don't believe most of the stuff published about investing. Instead, I have chosen to follow the basic tenets of mathematics and probability, since those are provable, while the opinions of Yellen, Obama, and assorted professional gurus are not.

I would say that your objective should NOT BE TO MAKE MONEY. It should be to make the highest compounded rate of gain per unit time possible. If you do this, the dollars will take care of themselves.

If you are truly interested in winning this game, you must be prepared for long hours, analyzing an unending succession of material, and testing your hypotheses without end. But more important than anything else, you must learn how to synthesize data into a credible and productive point of view. The scientist does this with a tool called mathematics.

Here's an example. You buy a stock on Monday for $10. Tuesday morning you sell it for $11, making a 10% profit per market day. If you hold it till next Monday, it would have to rise to over $16.10 to maintain your first days compounded rate of gain. If you hold it a month, say 22 market days, it would have to rise to over $81.40 to maintain your first day rate. The longer you hold it, the lower the probability that you will be able to match that first days rate. This tells you immediately that LONG TERM BUY AND HOLD IS SILLY.

Well, why do all of the fund managers, the bankers, the investment gurus tell you to buy and hold??? Simple -- they want your money committed to their accounts.

You asked specifically about INDEX INVESTING. Simple tests will show you that in general they are not volatile. It is a way of reducing losses. But it is also a way of reducing PROFITS. Their lack of volatility limits the amount of potential gain.

Why don't you start with a bit of study of the requisite math. I think you will be amazed.
 
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