Monday, March 17, 2008

How Much Does It Cost To Beat the Market?

I was recently reading the New York Times and came across a very interesting article by Mark Hulbert. In his article he outlines the results of a recent study that attempted to quantity the collective cost of Americans trying to beat the market. The study entitled “The Cost of Active Investing” found that collectively it is costing Americans roughly $100 billion annually to try and beat the market. The study “took into account the fees and expenses of domestic equity mutual funds (both open- and closed-end, including exchange-traded funds), the investment management costs paid by institutions (both public and private), the fees paid to hedge funds, and the transactions costs paid by all traders (including commissions and bid-asked spreads). If a fund or institution was only partly allocated to the domestic equity market, he counted only that portion in computing its investment costs.

Professor French then deducted what domestic equity investors collectively would have paid if they instead had simply bought and held an index fund benchmarked to the overall stock market, like the Vanguard Total Stock Market Index fund, whose retail version currently has an annual expense ratio of 0.19 percent. The difference between those amounts, Professor French says, is what investors as a group pay to try to beat the market.”

The results of this study imply that there are really only 2 strategies that investors should stick with:

1. Buy and hold a diversified portfolio.
2. Play the market through low cost ETFs.

To view the entire article please follow this link.

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Anonymous said...

Market timing with ETF's and leading equities from specific sectors is my particular style. For example, heavy overweight in energy, mostly natural gas (ECA, NXY, dumped my TLM earlier this year), started selling everything as ECA stalled out after pushing to new 52 week highs. Rebought a smaller ECA position but a more concentrated HBP "HEU" position last week.

Had no financials exposure this year at all (except for the occasional short exposure via HFD), until Monday last week - added a large position in XFN/HFU.

Is this bounce a "bottom"? Seems unlikely; if anything else markets will stall some as the bounce nears the 50 period EMA of the broader markets - another day or so at this rate. What happens then - a minor pull back or rapid descent - will tell us much. In particular with my HFU, bought at a very good price, I'll probably sell 1/2 on any weakness that develops near the aforementioned EMA, with a view to following the retreat down with buy stop orders above to catch a push back up.

Active management of a smaller pool of stocks / sectors is actually fairly easy to do, and beating the market is more than achievable. With transaction costs so low these days, particularly in tax deferred accounts it makes sense to take some off the table when the prevailing trend is not with you.

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