|
Page 1 of 3  One of our readers wrote recently to say he was thinking of indexing, but was
struggling with the argument that dividend stock picking can beat index investing during a secular bear market, the argument being that the downside is less than the index.
He asked if there were arguments showing that indexing is still a good strategy during a secular bear market. Our commentary looks at the truth about indexing in the light of the recent bear market: indexing no longer works- myth or reality.NOTE TO READERS: We are happy to report that our commentary is also published in the 202nd edition of the Carnival of Personal Finance.
Secular bear market?
The word secular is derived from the latin, meaning "of or belonging to an age or long period", sometimes understood as 10 to 50 years or more; see Wikipedia
and the glossary by
Harvey,  Campbell R
.
We hope that his use of this term does not mean that we are facing 50 years of difficult markets.
Summary of issue
The essence of the question of our reader is whether individual stock picking (a form of active management of investments) is now preferable to an index or passive approach. The wording of the question suggests that our reader is favorably pre-disposed to the index approach, but wonders whether, in light of the 2008 market decline, and his fear that we are in a secular decline, he should turn to another approach.
His question is really two questions: whether we can predict market downtrends (whether cyclical or secular), and whether a non-index approach (favoring certain sectors or types of shares or companies) is better in such a market.
Market timing is the opposite of a buy and hold approach to investing. It is often associated with individual stock picking
since both are forms of active management used to try to beat the market, but for us they are two different concepts.
Let’s look at the following table:
Market timing
Buy and hold
Individual stock picking
Indexing
In this table either of the elements in the first line can be used with either of the elements of the second line. For example, a buy and hold approach is often associated with indexing (because both are passive techniques) but at least in theory, it can also be used by investors who are individual stock pickers
.
Beating the market- in general
Market timing and individual stock picking are both active investment techniques used to try to beat the market. Our site looks in detail at whether an investor should have, as a policy, trying to beat the market; see Beat the market?
on our site. Our conclusion: the chances of successfully beating the market are not promising.
Our reader asks whether the use of market timing and individual stock picking is more appropriate in a secular bear market. So let’s look at these two issues in the light of current markets.
<< Start < Prev 1 2 3 Next > End >>
|
