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maybe index funds are better? (article)

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maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 12:57
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Re: maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 14:15
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Buying into an investment because you think it's going to do well in the short-term. So, let's say buying a lot of bank stock now because it's fallen as low as it could possibly fall, and can only go up from here on would be "timing the market."

You're essentially trying to buy before the market rises, or conversely sell before it falls.

Index funds on the other hand, are "buy and hold" investments which are sensible if you're saving with a longer time horizon in mind.

isa wrote:
Silly question: what does it mean to "time the market"?
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Re: maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 14:16
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Silly question: what does it mean to "time the market"?


It's when someone tries to buy and sell their investments at the optimum time (buy it when it's at the bottom and sell at the top).

For example, a lot of people have decided they've had enough of stocks right now and have sold either all their stocks or most of them. They think "I'll just hold my money as cash for right now, but as soon as the market starts to go up, I'll reinvest."

The problem is, very few people are any good at figuring out when the right time is. There are always people that guess right, but the problem is, it's just a guess.

There are people who are very successful investors who successfully time the market. Often these people invest in a very specific market (say oil) and spend an extraordinary amount of time doing market research. And even then, they often guess wrong.

Warren Buffet is often held up as a guy who knows what to buy and when. He's not the best example because he often buys enough stock so that he has a say in how the company is run as well. It kinda makes his bets a little more solid.

William Bernstein is of the mind that you should never try and time the market. Simply buy a mix of assets that historically gives you the best return for the least amount of risk. The only buying and selling that you do is to periodically "rebalance" your portfolio so that you maintain the same mix of assets. The logic is you won't always beat the market, but you'll always at least match the market (which historically has been 4-8% annually, depending on the asset mix).

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Re: maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 13:12
If you read Bernstein's "Four Pillars of Investing" or, for the more mathematically inclined, "Intelligent Asset Allocation", he makes a very compelling argument for index funds.

I've been organizing my portfolio around his ideas only because it seems to make a lot more sense than trying to time the market.

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Re: maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 13:18
refurb wrote:
If you read Bernstein's "Four Pillars of Investing" or, for the more mathematically inclined, "Intelligent Asset Allocation", he makes a very compelling argument for index funds.

I've been organizing my portfolio around his ideas only because it seems to make a lot more sense than trying to time the market.

RF


Silly question: what does it mean to "time the market"?
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Re: maybe index funds are better? (article) [#permalink] New post 23 Feb 2009, 15:48
Thank you refurb and solaris1 - that makes a lot of sense. :)
Re: maybe index funds are better? (article)   [#permalink] 23 Feb 2009, 15:48
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