Passive investing

In my articles I try to persuade the readers of my blog that investing is not a difficult undertaking at all. It is absolutely sufficient to follow a few simple rules – e.g. to invest in low cost passively managed index funds, to diversify broadly, to keep the costs as low as possible, to not trade or speculate, to hold the investments as long as possible. This is good news for all of us. We do not have to financially support the bankers, expensive investment advisors, or brokers.

The reason being that the gyrations of the market are random. What is more, the market reacts lightning-fast to news. Yesterday news are already built into today’s prices. But I absolutely understand that it is very hard for everybody of us to accept this. Especially in a world where we all day long hear stock recommendations from various ‘experts’, advisors, bankers, in a world where we face offers full of quick to get rich trading systems.

One of the the many evidences that markets are random is the fact that not even proclaimed financial experts can predict the movements of financial markets. I came across a good example from a new book  Future Babble: Why Expert Predictions Fail – and Why We Believe Them Anyway written by a journalist Dan Gardner. In the book he enlists a large number of failed predictions of various experts.

Interersting is the interview conducted by the magazine The Economist in 1984. They asked 16 people to make 10 years predictions of the economic growth, inflation, foreign exchange and oil prices. Four of them were finance ministers. Another four were CEOs of multinational corporations, another four were students of economics at the Oxford University. The last group of four were Londoner dustmen. In 1994, The Economist reviewed their predictions and the results were amazing – the CEOs tied for the first place with the dustmen! Finance ministers ended up last.

Via The Globe and Mail.