Pros and cons of the "holy grail"

Investing / Others
25

Goofy likes the quotes around passive. :hugs:

Nitpick: it’s actually comparing individual investors against mutual funds, which in general still tend to have higher fees than ETFs afaik. But it still would not explain the difference.

With some pocket change[$] you can purchase the report here: 2025 Quantitative Analysis of Investor Behavior (QAIB) Report

Take one for the team, c’mon, @cubanpete_the_swiss!

Pro tip (for all readers, not singling out @Mirager): shave off 10% of your time spent on this forum and use it for exploring investing on your own.[$$] :wink:

I was going to suggest that there are surgical solutions to this, but the image in my head became too graphic so I’ll refrain from going into detail.

<insert Beavis and Butt-Head grunt chuckle here>

Actually, more seriously on this one as well as the point above (“having the time”):

That’s probably the best argument for sticking to ETFs. While they have flaws – most are index huggers, indices aren’t really passive, obviously you have to pay finance industry via fees, most include turds, etc – the alternative requires conviction and time: in order to build your own portfolio, you need to build conviction, which at least I was only able to build over time[t], both calendar time as well as time invested into looking into what strategies and companies might work for you specifically.

For @cubanpete_the_swiss it’s mechanical strategies, for me it’s “loosely held convictions/rules” for selecting companies that produce and grow cash flows but also a little bit of a back stop of money like assets that reliably produce coupons (and slowly evaporate on the principle through inflation, as @cubanpete_the_swiss rightly points out).

For someone else it might be something different, but it needs to be homegrown – you can’t copy conviction.
The time to build your own strategy might be 6 months for some, it might be 6 years for someone else. And then again some maybe just cannot be bothered with it. Which is totally fine.

Edit: once you have the conviction for your own custom approach (and it actually works), the time required to maintain it indeed becomes tiny.

That’s actually Kara Swisher. Only she hasn’t found the key yet or lost the wallet alltogether.[BTC] But she’s still an XXilionaire.

$   USD 975

$$   Not only will you suddenly have plenty of time to look into your investments, you’ll also have more time to trade which in consequence will also … ahem, lower your returns … ?
Wait, what?

t   For me it was at least 8 years of hard-core ETF / index only investing before starting to touch individual stocks with a ten-foot-pole and then probably another 2-3 years of getting comfortable with a 75% stock picked portfolio.
Even though things have largely worked out since the inception of my stock picked portfolio, to this day I keep doubting my approach and keep fine-tuning it.

BTC   "During Bitcoin’s early days, Kara was working on a story about the cryptocurrency. “Someone I covered … said, ‘You should buy some, Kara.’ I go, ‘I’m not really going to buy this stuff, but I think I’ll write about it or talk about it.’” Ultimately, as part of her research, she did end up buying 10 bitcoins, but at some point she lost track of where they were stored. “I might’ve thrown it [out]. I’m sure I threw it out. I don’t keep those stupid things because I think they’re dangerous. I don’t know.”
— Tech media queen Kara Swisher on the secret to a great interview | by KindredMedia | Kindred Media | Medium
3 Likes
26

Just a quick clarification: the DALBAR report you mention isn’t about individual stock-picking investors beating ETF investors. It’s specifically about variable annuity investors — people who invest in mutual-fund-like subaccounts within an insurance wrapper. These aren’t classic DIY investors selecting individual stocks.

What explains their better performance? Behavioral discipline. Variable annuities often come with surrender charges and complex structures, which unintentionally discourage emotional trading. DALBAR found these investors held on longer and traded less — and that alone boosted returns.

So, it’s less a win for stock pickers, and more a case study in how structure can nudge better investing behavior.

That said, I agree it’s worth learning about investing. But for most, a low-cost ETF portfolio with real diversification is still hard to beat — especially if you’re not naturally calm during market dips.

14 Likes
27

Thanks, felt strange. I suppose individual investors without a mechanical strategy have even worse risk-adjusted numbers than ETF with thousands of unwanted stocks. That is why I hardly could believe they do better.

TLDR: if you can’t stick to a plan don’t invest. If you do not want to learn or spend time with investing your hard-earned money, investigate at least the ETF you are using. If you want to learn and have time, create a mechanical plan for single stocks and stick to it. It has an edge.

If you did choose an index with a board selecting the stocks, this board has exactly the same bias as any person, probably even more so as in the example of the SP500 where the board is anonymous.

And of course you still have the behavioral risk of the investor who may sell in a panic after losing, say, 50%. A situation hardly any of current holy grail investors has ever seen or is prepared for.

Now, buy and hold of a mechanical ETF should give you an edge. A mechanical single-stock strategy as I use gives you even more of an edge, but has a learning curve with the possibility of some expensive errors.

As I understand correctly the holy grail index is constructed mechanically. First countries are excluded according to some rules, then 85% of all stocks traded in a stock market of those countries left are bought, weighted by market cap.

Much garbage, top ten are 26% of holdings, the other 74% are scattered around the big rest. That has the advantage that you don’t hold much of the contained trash (zombies, high-debt companies, badly managed companies, cheaters and so on) and has the disadvantage that you hold a lot of what already has its growth in the past and almost nothing of what has its growth ahead.

But still, this is much better than to try to trade single stocks and falling for the over hundred bias that hurt us there.

But then, if you are willing to learn, invest some time and have the willpower to stick to a plan you have an edge and you will do better than the “average”, which can be calculated in many many ways. As every person and therefor their goals in life are different, the “do better” part is different too.

I myself for example wasn’t after performance first. I wanted cash flow and low volatility, it is my pension fund, my dividend strategy.

After that worked almost perfect I tried a momentum strategy I was testing and paper-trading for over a decade and that goes high-risk high-performance. It delivered even higher returns than expected.

We had very sunny days in the stock market for the last decade or even more. 2 or 3 bear markets that went by quiet fast. So everybody is delighted with “his” performance, no matter if it is an ETF or single stocks. The reality check comes with the next big drawdown.

Now, if you can’t stick to a plan, you may not stick to your ETF buy-and-hold plan. If you can stick to a plan you still may not want to learn or invest time into creating a good mechanical plan. But at least study the ETF you will use before you do so! It is not a religion like the “holy grail” title suggests: you should check the facts and not just be a believer!

4 Likes
28

I agree that one can construct a portfolio which is diverse and robust.

but it boils down to following

  • objective
  • Skills

If the objective is simply to preserve wealth and get inflation beating returns, index funds can do the job.

and we have to be honest, most people don’t have skills or confidence to build a portfolio like yours or one from @Your_Full_Name

1 Like
30

Skills and confidence are important, but can be learned. More important is discipline.

Time is a strange argument. Most people spend 40-60 hours a week to gain a bit of money and then don’t want to spend 5 minutes to think about money.

As I said, ETF are not a problem per se. But one should investigate and understand what is in it and how it works before investing. The “holy grail” that is recommended in all books that I did read ultimately and is almost like a religion in all forums may not be exactly what one wants. And when everybody does the same it gets suspect…

31

It is actually difficult to accumulate reliable personal finance knowledge. If you know what you are doing, the steps necessary look so simple. But if you know nothing there is so much dangerous misinformation out there. And if we are honest, even now we aren’t that certain about many things we think to be true.

It takes much more than 5 minutes to get somwhere. And if people had the willpower to better themselves whithout being interested or having to, there is probably a long list of things that could be done. I’m not sure personal finance is even on the top.

8 Likes
32

I think it would be important to also establish the additional value that can be generated by doing so.

in the link you shared, I could see following. but this doesn’t say if mutual fund investor is index fund investor or it includes all sort of funds (active and index)

do you happen to have actual report which shows historical difference in returns?

The Average Equity Subaccount Investor gained 19.60% in 2024, once again outperforming the Average Equity Mutual Fund Investor, who gained 16.54%, a difference of 3.06%.

33

I think in this post

@Ilpicone explained that it is only about annuity investors. I did not read the mentioned statistics paper, it costs more than $900… :frowning: