Various stock picking approaches

Investors seeking returns beyond the benchmark indices can take one of many approaches; for some examples, see Individual stock picking-if you must on our site. A policy of buying shares that pay dividends is one method for selecting individual stocks. This method is popular with many investors and advisers. There are sites dedicated to this approach, see The Div-Net and The Dividend Guy . Shares that pay dividends are found mainly among large-cap companies, which in Canada often means being over-weighted in shares issued by companies in the financial services sector.

Indexing- in general

Studies indicate that a long-term index approach is advantageous to most investors; see Beat the market? on our website, as well as articles by Perry 2009 doc.1309 and by Thorley 2009 doc.1312, and a study by Mark Kritzman cited by Hulbert doc.1306.

Indexing in bear markets

But non-indexing benefits from a popular belief, that in bearish stock markets, that they are more efficient than an index approach; for this argument, at least for shares of smaller capitalization companies, see the text by Arnerich Massena doc.1307. But the Arnerich Massena study and conclusions has been criticized (see criticism by Herr doc.1308). The Canadian Capitalist (see doc.1311A and doc.1311B ) has also pointed out some of the pitfalls in the argument about the advantages of stock picking in down markets.

Swedroe (Article 2009 doc.1313) and Damato doc.1310 are more categorical: it is a belief without foundation. Standard & Poors, in its most recent SPIVA study doc.1305 (on SPIVA in general, see our earlier commentary Your mutual fund and SPIVA ) published in 2009, i.e. after the market fall of 2008, goes so far as to say:

The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity boxes were outperformed by the negative indices in markets The bear market of 2000 to 2002 showed similar outcomes. See also the commentary on Oblivious Investor doc.1315

Conclusion

We do not believe investors can predict with a high degree of confidence whether we are in a bear market, how long it will be, or when it will end. Despite the bear market of 2008, we continue to believe that a passive approach to investing, avoiding market timing and individual stock picking techniques, will give the best long-term results for the typical investor. So how should you deal with today’s difficult financial markets? We don’t recommend moving to individual stock picking. For some ideas on how to react, read our earlier commentaries Panic on Wall Street: How should investors react? and In bear markets, impatient investors learn from soccer goalie .