Professional equity managers — of mutual funds, pension funds or hedge funds — use a number of methods to try to beat their benchmark index. These broadly fall into one of two camps, “active” and “passive,” and a debate over which gets better results has raged since at least the late 1960s.
Today’s column will help you recognize what you don’t have to do, deal with, pay for or worry about. Add all of these things together and you not only neutralize the disadvantages, but you can jiujitsu them to your favor. Let’s see if we can help you beat the pros by looking at five key areas: benchmarks, costs and fees, time, size, and career risk:
The concept of “no free lunch” was popularized by two disparate characters: One was sci-fi writer Robert Heinlein, who offered it up in his Hugo award-winning 1966 book, “The Moon Is a Harsh Mistress.” The other was economist Milton Friedman, who actually wrote a book called, “There’s No Such Thing as a Free Lunch.”
As a matter of fact, last year, Americans spent more than $70 billion on state-run lotteries. To put that into context, that’s more money than Americans spent on sports tickets, books, video games, movie tickets and music plus all of the apps, games and programs bought from Apple’s iTunes App Store — combined. That is a whole lot of money, poorly spent.
Financial markets around the world continued to melt down today. The Dow Jones Industrial Average was down 1,000 points at one point this morning (it has since rebounded). Asian and European shares are down even more. Oil has fallen below $40 a barrel.
Let me be clear: I have no idea whether stocks are going to keep tumbling or if they’ll quickly rebound. I don’t know what’s causing today’s collapse. (“Fears that China’s economy is slowing dramatically,” as The Wall Street Journal wrote Monday? Sure, but those fears have existed for months.) I don’t think a few days of turmoil are a sign that the U.S. is headed for another recession, but economists are notoriously terrible at predicting recessions.
As investors watched global stock markets tumble, the behavioral economist Richard Thaler, who is also an occasional contributor to The New York Times, offered the following advice: “Inhale, exhale. Repeat. Then watch ESPN.”
Mr. Thaler’s advice flows from knowing that people are loss averse. It’s an insight he owes to the Nobel Prize-winning psychologist Daniel Kahneman, who has found that a loss yields roughly twice the psychological effect of an equivalent-size gain.
“The fact is, 9 of 10 women will be solely responsible for their finances. They will either never marry, marry and divorce or separate, or will be widowed. It’s critical that women know they have to take control of their financial future. The onus is on them to save for retirement.”
Risk, while unwelcome, is an integral part of any investment choice we make. Investment risk is the probability of loss on investment. If this probability is higher, the investment is high-risk; if low, it is low-risk. Investment in equities, commodities, equity mutual funds of various types and market indices fall under the high-risk category, while those in high-grade corporate bonds and bond funds come under the low-risk category.
It may sound counter-intuitive, but risk-free investments, too, carry some risk. The risk, in this case, is not probability of losing money or of government or institutions defaulting on their payments. Rather, such risks are related to interest rate variations, inflation and macroeconomic failure.