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It is possible to
invest and relax without fretting over the ups and downs of the market.
This 12-Step Program has explained many advantages of passive indexing
over active investing. Investing in this passive approach provides freedom
from stress, anguish and the panic of active investing. Remember, indexing
is not designed to be a quick fix and does not carry the seductive quality
of gambling or day trading. This approach neither has the sizzle the media
likes not does it feed the adrenaline rush of chasing leads or returns.
Active investing often leads to lost opportunity. Like most things of
value in life, passive investing takes discipline and time to reap the
rewards. It is the most intelligent and prudent way to build wealth over
the long run. Indexing is a journey, a lifestyle, a process based on a
solid academic foundation of empirical research. Look again at this quick
review of this 12-Step Program. It substantiates the case for passive indexing
by demonstrating the following:
• It is virtually impossible to beat a market over time through
active investing.
• Indexing is backed by Nobel laureates who have provided unbiased,
rigorous, empirical research, most notably Modern Portfolio Theory.
• Stock pickers are analogous to gamblers who rely on feelings and
emotions when making bets.
• Time pickers or market timers move money in and out of different
investments in an attempt to profit from short-term cyclical events, which
is a futile endeavor.
• Manager picking is not a reliable practice because the past performance
of money managers does not predict their future performance. Star money
managers fall from their stature sooner or later, since their stellar
performance is attributed to Lady Luck rather than skill.
• Style drift is detrimental in maintaining an efficient portfolio
because it changes the portfolio’s risk exposure. This is a problem
when risk exposure has carefully been chosen based on an investor’s
predetermined risk capacity.
• Silent partners in active management diminish an investor’s
wealth by eating large slices of the investment pie.
• Understanding riskese, the language used to discuss the relationship
between risk, return, and time is essential to engaging in the ownership
of risk.
• To achieve above average returns, assets must be exposed to above
average risk over a long period of time because of the relationship between
time, risk, and return.
• Index funds are based on a long history of data dating back to
1926. Knowledge and understanding of this long-term historical data helps
investors make intelligent decisions on portfolio asset allocation.
• Each investor has a personal risk capacity, a key component in
choosing a portfolio.
• The mixture of indexes in a portfolio or the asset allocation
accounts for 100% of the variance of long-term return. Asset allocation
is the most important decision an investor can make.
• The most efficient way to invest is to hold a portfolio comprised
of global diversified index funds.
• Dimensional Fund Advisors (DFA) offers the highest rated, most
efficient and lowest cost institutional funds, now available to individual
investors through registered investment advisors.
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"
A decade ago, I really did believe that the average investor
could do it himself. After all, the flesh was willing, the vehicles
were available, and the math wasn't that hard. I was wrong.
Having emailed and spoken to thousands of investors over the
years, I've come to the sad conclusion that only a tiny minority,
at most one percent, are capable of pulling it off. Heck, if
Helen Young Hayes, Robert Sanborn, Julian Robertson, and the
nation's largest pension funds can't get it right, what chance
does John Q. Investor have? " |
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“Most of
the mutual fund investments I have are index funds, approximately
75%.” |
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Charles
Schwab, Guide to Financial Independence
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"
The investor's chief problem - and even his worst enemy - is
likely to be himself. " |
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Benjamin
Graham (1894-1976) Legendary American investor, scholar, teacher
and co-author of the 1934 classic, Security Analysis |
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“
There are two times when a man shouldn't speculate: when he
can't afford it, and when he can. ” |
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Mark
Twain, Following the Equator, Pudd'nhead Wilson's New Calendar |
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“
Most investors, both institutional and individual, will find
the best way to own common stocks is through an index fund that
charges minimal fees. Those following this path are sure to
beat the net results (after fees and expenses) delivered by
the great majority of investment professionals. ” |
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Jason
Zweig spoke to Chuck: " He said "Buy index
funds. It might not seem like much action, but it's
the smartest thing to do."
