Comments on: Bogleheads Guide to Investing Review: Chapter 7 – Keep It Simple

By: Catch a Gideon

Catch a Gideon — Thu, 07 Dec 2006 04:43:22 +0000

It's too bad simplicity is so unexciting. I think people like to hear the cool new thing they can do with their money. I for one am relieved that I can put money into simply managed accounts and leave it. I keep some outside of that to play with other investments. Here's my take on Keeping It Simple, part of the Bogleheads Series at Successful Personal Finance.com.

By: FIRE Finance

FIRE Finance — Mon, 23 Oct 2006 17:59:53 +0000

Book Review – The Bogleheads’ Guide To Investing

AllFinancialMatters has started a remarkable project named “The Boggleheads’ October Project”. In this project a group of 23 personal finance bloggers are reviewing each of the 23 chapters of the book “The Bogleheads’ Guide To Investing”. The goa…

By: fivecentnickel.com

fivecentnickel.com — Sat, 14 Oct 2006 23:27:21 +0000

Weekly Roundup – 10/13/06

By: lowwall

lowwall — Fri, 13 Oct 2006 17:35:26 +0000

LAMoneyGuy.

There is a common misperception that indexing just means an S&P 500 or total market fund. But there are also good index funds that cover every segment of the market, from microcaps to REITs to emerging markets.

By building a sensible allocation among the various asset classes (including bonds) and rebalancing at regular intervals, you avoid the worst excesses of bubbles and benefit over time from being forced to sell the relatively overpriced assets and buy the relatively underpriced. Which is the exact opposite of how most people invest.

By: Free Money Finance

Free Money Finance — Fri, 13 Oct 2006 10:23:00 +0000

Star Money Articles for the Week of Oct. 9

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Blueprint for Financial Prosperity asks you to analyze his homeowner’s policy. Consumerism Commentary details his current asset allocation. AllFinancialMatters…

By: paulob

paulob — Wed, 11 Oct 2006 12:26:26 +0000

I don’t think LAMoneyGuy understands Style Drift. What he refers to is simply an asset allocation that needs to be rebalanced. Style Drift is a term that refers to when an active manager deviates from a style, class or index as described in the strategy of the fund.

E.G. you invest in a small cap fund. The prospectus allows the manager leeway to invest up to 20% in foreign securities. In between sem-annual reports, your manager takes your domestic fund and turns it into a partial foreign fund. This changes your risk/return profile.

This does not happen with an index fund so I believe the authors’ statement is correct.

Paul

By: jim

jim — Tue, 10 Oct 2006 19:50:58 +0000

LAMoneyGuy: That’s a good point, there is a bit of a popularity game with index funds only because they match the market and the hottest things going will be more heavily represented in an index fund.

By: LAMoneyGuy

LAMoneyGuy — Tue, 10 Oct 2006 19:20:42 +0000

Interesting review. I agree with most of it. Clearly index funds, or ETFs are the simplest, most efficient way for investors to go. The only point among the 7 items listed that surprised me was the last one, “Style drift and tracking errors aren’t a problem.” Actually, the style drift part in particular. One problem that index funds have is the natural overweighting of the most recent hottest performing group.

For example, by early 2000, even index funds were heavily weighted in technology stocks. This is not because the manager intentionally overweighted to beat the market, as was the case with many managed funds, but the market value of tech stocks overwhelmed the rest of the market, resulting in many index funds being 30-35% invested in the tech sector.

The lesson of my comment is that index investing should be accompanied by a well thought out asset allocation plan and regular rebalancing. Otherwise, the most risk is taken at the peak of markets, because that which went up the most will represent the largest weighting in the indices. And typically, what goes up the most, goes down the most.