Which index is the best to follow?

[hiriskpaul]

I'm not sure that a decade's returns are a good basis on which to choose an index. Asset classes, and sub-classes like regional equities, go through higher and lower performance cycles compared with sensible comparators, cycles which can last at least a decade, so it's not a reliable guide to future performance. Which is why every investment document includes 'past performance is no guarantee....'. Because that has become mundane advice, don't mistakenly pay it too little attention.
If the last decade's performance did perfectly predict the next decade's, it wouldn't help you much if you were investing for four decades.
Indexes don't incur trading costs, so fund managers might choose an index because they can track it more cheaply than another. Keep that in mind if you think performance is crucial.

I think a decade is a good starting point - looking at the table in the image I proivde above you can see very large differences between indices - essentially showing that you would have been better off investing in a world index over a 10 year period and seeing that all of the UK indices underperformed against it. This I think links to a point you made about REGIONAL EQUITIES or even national equities. We now have a far greater choice and it is a fact that different regions are performing differently and whilst past performance is no guarantee neither can it be completely dismissed. The chart and the table above provide plenty of evidence showing large differences in different indices.

FTSE all-share index total return from end 1970 to end 2010 was 17.3% per year. MSCI World Index ex-UK was 14.9% per year (in pounds). So the FTSE all-share was the better index to plump for at the end of 2010, following 3 decades of clear outperformance. Remind me what happened next.

If it was possible to extrapolate future performance based on the last 10 years, a very profitable risk free trade would be to go long the "good" index, short the "bad". Easily achieved at low cost using equity index futures. As equity markets are highly correlated, you could safely gear that trade up by a factor of 3-4. Free money, no risk. An easy route to becoming a multi-millionaire.

4 decades, not 3!

The breakdown of annualised TR across 5 decades:

date range  Wrld ex-UK         UK
1970-1980    9.6%             14.2%
1980-1990   17.2%             18.8%
1990-2000   15.4%             15.0%
2000-2010    2.2%              3.4%
2010-2020   12.5%              5.6%
1970-2020   11.3%             11.3%

[JohnW]

Yes, I think I'm ok with that example. You didn't say what your 104p security is currently trading at, and it might matter.
But, if you agree with the market and it's trading at 104p, then it's unlikely you'll find someone to sell at 16p since they can see that the current buy/sell spread is around 104p; nonetheless, let's imagine such people exists and they hold a LOT of stock in that company. You buy it all for 16p, the 'last price' appears as 16p, but now all the sellers are at about 103p, and all the buyers are at 104p. I don't think the market is now pricing it at 16p, despite that being the last price; indeed I'm sure of it.
For such dumb sellers, and of course there'll equally be dumb buyers who would overpay, to exist they'll have to be getting some poorer than otherwise possible returns - yep, we know that happens, but if they exist in sufficient numbers then they are a component of what makes 'the market'. So yes, the market does not always price its assets perfectly, as we see during periods of exuberant buying and panic sell-offs. There is a steady-ish value of the market which seems to have gone up progressively over many decades based on the business success of the market components, on top of which are irrational spurts and sell-offs when sentiment gets the better of good judgment.
The index tracking folk recognise this, and say 'we have to be in this for the long haul, so the spurts and sell-offs overall largely cancel each other out and we're left with the returns based on the profitability of the market securities'. Another group of people think they can get some above-market returns out of knowing about these spurts and sell-offs by dumb investors; trouble is very few can pull it off for any length of time, as evidenced by the SPIVA reports on active fund management. And knowing who will do it ahead of time is harder than very hard.

[tjh290633]

either you're not investing optimally or you think you know something the rest of the market doesn't know.

And a false dichotomy, and plain wrong in fact. The market does not price optimally, it prices based on the level the most stupid trader currently wishes to trade at. Why this is not blindingly obvious I have no idea. Very simple example: say I think a security is worth 104p. As a canny investor I am not going to go out there and pay 104p to buy it! There is someone willing to sell it to me at 16p. So I don't say to them, hey these are probably worth 104p, let's agree a price much closer to that because the market is efficient after all. I happily buy them at the offered 16p. Then the "market" says that I think they are worth 16p and the seller thinks they are worth 16p. NO! That is just the price we traded at. My real valuation of them was 104p but I bought them for 16p because someone was happy to sell at that price. The current trading price tells you nothing about the value of an investment and nothing about the market's valuation of an investment. It just tells you the price the dumbest person at the time is happy with.

I guarantee, the moment an investor figures this out properly for himself his investment performance will improve.

GS

I think that your suggestion is wide of the mark. In a rising market the sell price is determined by the most pessimistic trader and the buy price by the most optimistic. You could say the same for a falling market. Is the optimistic trader the dumbest? In that case everyone who buys a share is dumb and everyone who sells a share is the smartest.

Presumably in your view the same criteria apply to those who buy or sell bonds and gilts. I decline to buy gilts unless they are trading below par value. I choose to buy shares with a higher yield than average. I am happy with my investment performance.

TJH

[GoSeigen]

I think that your suggestion is wide of the mark. In a rising market the sell price is determined by the most pessimistic trader and the buy price by the most optimistic. You could say the same for a falling market. Is the optimistic trader the dumbest? In that case everyone who buys a share is dumb and everyone who sells a share is the smartest.

There is no such thing as a sell price and a buy price: there is only one price, the price of the trade, which is the price at which both buyer and seller transact, so I'm afraid no credence at all can be given to TJH's version. It fails in its premises which are factually incorrect.

GS

[mc2fool]

The breakdown of annualised TR across 5 decades:

date range  Wrld ex-UK         UK
1970-1980    9.6%             14.2%
1980-1990   17.2%             18.8%
1990-2000   15.4%             15.0%
2000-2010    2.2%              3.4%
2010-2020   12.5%              5.6%
1970-2020   11.3%             11.3%

Matter of curiosity, where are you getting those figures from? Got a link please? (To be clear, not that I doubt them at all, just wondering where to find them!)

[hiriskpaul]

The breakdown of annualised TR across 5 decades:

date range  Wrld ex-UK         UK
1970-1980    9.6%             14.2%
1980-1990   17.2%             18.8%
1990-2000   15.4%             15.0%
2000-2010    2.2%              3.4%
2010-2020   12.5%              5.6%
1970-2020   11.3%             11.3%

Matter of curiosity, where are you getting those figures from? Got a link please? (To be clear, not that I doubt them at all, just wondering where to find them!)

Courtesy of a friend with access to a financial database!

I wish there was more data online. Annual FTSE all-share returns from 1962 are in the Barclays Equity Gilts Report. Unfortunately free download links all seem to have disappeared.

MSCI World, but not World ex-UK, are available on Wikipedia: https://en.wikipedia.org/wiki/MSCI_World
These are dollar returns. To convert to sterling you need annual FX rates, which you can get from various sources, eg: https://www.macrotrends.net/2549/pound- ... ical-chart. For a few years prior (back to 1967 I think) it was fixed at $2.40 under Bretton Woods.

[1nvest]

The breakdown of annualised TR across 5 decades:

date range  Wrld ex-UK         UK
1970-1980    9.6%             14.2%
1980-1990   17.2%             18.8%
1990-2000   15.4%             15.0%
2000-2010    2.2%              3.4%
2010-2020   12.5%              5.6%
1970-2020   11.3%             11.3%

Matter of curiosity, where are you getting those figures from? Got a link please? (To be clear, not that I doubt them at all, just wondering where to find them!)

Courtesy of a friend with access to a financial database!

I wish there was more data online. Annual FTSE all-share returns from 1962 are in the Barclays Equity Gilts Report. Unfortunately free download links all seem to have disappeared.

MSCI World, but not World ex-UK, are available on Wikipedia: https://en.wikipedia.org/wiki/MSCI_World
These are dollar returns. To convert to sterling you need annual FX rates, which you can get from various sources, eg: https://www.macrotrends.net/2549/pound- ... ical-chart. For a few years prior (back to 1967 I think) it was fixed at $2.40 under Bretton Woods.

Would also be nice to more often see figures for net of inflation and basic rate taxation. UK stock decades annualised for instance ...

1970's	-4.1%
1980's	14.1%
1990's	9.8%
2000's	-1.8%
2010's	4.7%

But that's rarely the case. Nominal values excluding inflation and taxation/costs aren't really informative. If you're also drawing a income on top such as a 4% SWR and the nominal figures for the 1970's for instance seem to comfortably fit that, whilst the net real figures suggest otherwise.

1960's/1970's combined and stock net total real returns were 0% annualised. Drawing any income was eating capital for as long as it lasted.

[hiriskpaul]

Matter of curiosity, where are you getting those figures from? Got a link please? (To be clear, not that I doubt them at all, just wondering where to find them!)

Courtesy of a friend with access to a financial database!

I wish there was more data online. Annual FTSE all-share returns from 1962 are in the Barclays Equity Gilts Report. Unfortunately free download links all seem to have disappeared.

MSCI World, but not World ex-UK, are available on Wikipedia: https://en.wikipedia.org/wiki/MSCI_World
These are dollar returns. To convert to sterling you need annual FX rates, which you can get from various sources, eg: https://www.macrotrends.net/2549/pound- ... ical-chart. For a few years prior (back to 1967 I think) it was fixed at $2.40 under Bretton Woods.

Would also be nice to more often see figures for net of inflation and basic rate taxation. UK stock decades annualised for instance ...

1970's	-4.1%
1980's	14.1%
1990's	9.8%
2000's	-1.8%
2010's	4.7%

But that's rarely the case. Nominal values excluding inflation and taxation/costs aren't really informative. If you're also drawing a income on top such as a 4% SWR and the nominal figures for the 1970's for instance seem to comfortably fit that, whilst the net real figures suggest otherwise.

1960's/1970's combined and stock net total real returns were 0% annualised. Drawing any income was eating capital for as long as it lasted.

Yes sure, but the comparison was about drawing conclusions about the future performance of an index based on the previous 10 years performance. Nominal or inflation adjusted, it is not reliable.

[mc2fool]

The breakdown of annualised TR across 5 decades:

date range  Wrld ex-UK         UK
1970-1980    9.6%             14.2%
1980-1990   17.2%             18.8%
1990-2000   15.4%             15.0%
2000-2010    2.2%              3.4%
2010-2020   12.5%              5.6%
1970-2020   11.3%             11.3%

Matter of curiosity, where are you getting those figures from? Got a link please? (To be clear, not that I doubt them at all, just wondering where to find them!)

Courtesy of a friend with access to a financial database!

I wish there was more data online.

Cheat! Yeah, I wish so too, hence my question. Wikipedia showing return for MSCI World is a surprise though!

[tjh290633]

There is no such thing as a sell price and a buy price: there is only one price, the price of the trade, which is the price at which both buyer and seller transact, so I'm afraid no credence at all can be given to TJH's version. It fails in its premises which are factually incorrect.

GS

So the spread is a fiction of my imagination? Get real.

TJH

[NotSure]

either you're not investing optimally or you think you know something the rest of the market doesn't know.

And a false dichotomy, and plain wrong in fact. The market does not price optimally, it prices based on the level the most stupid trader currently wishes to trade at. Why this is not blindingly obvious I have no idea. Very simple example: say I think a security is worth 104p. As a canny investor I am not going to go out there and pay 104p to buy it! There is someone willing to sell it to me at 16p. So I don't say to them, hey these are probably worth 104p, let's agree a price much closer to that because the market is efficient after all. I happily buy them at the offered 16p. Then the "market" says that I think they are worth 16p and the seller thinks they are worth 16p. NO! That is just the price we traded at. My real valuation of them was 104p but I bought them for 16p because someone was happy to sell at that price. The current trading price tells you nothing about the value of an investment and nothing about the market's valuation of an investment. It just tells you the price the dumbest person at the time is happy with.

I guarantee, the moment an investor figures this out properly for himself his investment performance will improve.

GS

What if this "stupid trader" thought the share was actually worth 4p? In their eyes, the one paying 16p is the dumb one? How does this not work both ways? Surely there are typically 100s or 1000s of traders in any particular share on any particular day, not just you and some idiot?

[AWOL]

either you're not investing optimally or you think you know something the rest of the market doesn't know.

And a false dichotomy, and plain wrong in fact. The market does not price optimally, it prices based on the level the most stupid trader currently wishes to trade at. Why this is not blindingly obvious I have no idea. Very simple example: say I think a security is worth 104p. As a canny investor I am not going to go out there and pay 104p to buy it! There is someone willing to sell it to me at 16p. So I don't say to them, hey these are probably worth 104p, let's agree a price much closer to that because the market is efficient after all. I happily buy them at the offered 16p. Then the "market" says that I think they are worth 16p and the seller thinks they are worth 16p. NO! That is just the price we traded at. My real valuation of them was 104p but I bought them for 16p because someone was happy to sell at that price. The current trading price tells you nothing about the value of an investment and nothing about the market's valuation of an investment. It just tells you the price the dumbest person at the time is happy with.

I guarantee, the moment an investor figures this out properly for himself his investment performance will improve.

GS

The bid and ask prices are set by the market and the mid-price is commonly used as the markets valuation of an equity. How else does the market weighing machine express the value other than the current asking price and the current bid price. Once a trade is done of course it is the next remaining ask and bid price that set the price. It is the buying and selling that weighs the value as the market is made up of the participants ranked from most to least attractive price. The market value = share price x number of shares.

I think the really interesting bit is... is the market efficient. In an absolute sense then it's clearly not (otherwise irrational effects like momentum wouldn't be possible as the price would immediately correct to include new information whereas momentum shows that stocks continue to gain value over extended periods of time). So that leads to the question to what degree is it efficient and to what degree to markets vary in efficiency. It can clearly be seen that the S&P500 is highly efficient although arbitrage is still possible to it's not 100%. Other markets such as the FTSE Small Cap are far from efficient.

So what to do... it turns out that most markets are efficient enough that their large cap markets are unlikely to be worth the risk of active fund management (although the FTSE100 may be an exception). There is a good case for active investment in small caps in theory although in practice this has worked best outside the US. Liquidity issues suggest that a closed ended vehicle would be best. Then there is the question of whether charges make the small over large premium investible...

[GoSeigen]

either you're not investing optimally or you think you know something the rest of the market doesn't know.

And a false dichotomy, and plain wrong in fact. The market does not price optimally, it prices based on the level the most stupid trader currently wishes to trade at. Why this is not blindingly obvious I have no idea. Very simple example: say I think a security is worth 104p. As a canny investor I am not going to go out there and pay 104p to buy it! There is someone willing to sell it to me at 16p. So I don't say to them, hey these are probably worth 104p, let's agree a price much closer to that because the market is efficient after all. I happily buy them at the offered 16p. Then the "market" says that I think they are worth 16p and the seller thinks they are worth 16p. NO! That is just the price we traded at. My real valuation of them was 104p but I bought them for 16p because someone was happy to sell at that price. The current trading price tells you nothing about the value of an investment and nothing about the market's valuation of an investment. It just tells you the price the dumbest person at the time is happy with.

I guarantee, the moment an investor figures this out properly for himself his investment performance will improve.

GS

The bid and ask prices are set by the market and the mid-price is commonly used as the markets valuation of an equity. How else does the market weighing machine express the value other than the current asking price and the current bid price.

Are you seriously suggesting that is the ONLY way possible? I know it is ubiquitous, I'm just trying to express that it is terribly crude and it's not in the least surprising to me that people get confused about values of investments as a result.

Once a trade is done of course it is the next remaining ask and bid price that set the price. It is the buying and selling that weighs the value as the market is made up of the participants ranked from most to least attractive price. The market value = share price x number of shares.

Again this is the accepted wisdom, but I don't agree. This to me is one mechanism by which traders are matched in securities markets, but to then say "The market value = share price x number of shares" is to too narrowly define "market value". Or too attach too much significance to this crude number.

I think the really interesting bit is... is the market efficient. In an absolute sense then it's clearly not (otherwise irrational effects like momentum wouldn't be possible as the price would immediately correct to include new information whereas momentum shows that stocks continue to gain value over extended periods of time). So that leads to the question to what degree is it efficient and to what degree to markets vary in efficiency. It can clearly be seen that the S&P500 is highly efficient although arbitrage is still possible to it's not 100%. Other markets such as the FTSE Small Cap are far from efficient.

I don't think momentum is at all irrational if you accept what I say above. It's a simple acceptance that the current marginal trades to not reflect the view of the market on the value of the security. If you believe, for example that dumb money is selling and that prices are thus somewhat below where the smart money believes they should be then it's perfectly rational to suppose that the price will rise over time. Further, it is perfectly rational to project that your return will be current yield + annual price growth. I think it is also rational to believe that because of inertia prices will overshoot the [smart money] true valuation and that the dumb money will switch to overpaying.

I am an engineer and anyone with a similar maths background will see the parallels with harmonic motion. Harmonic motion is difficult to understand but it is not irrational. Overshooting the equilibrium point (aka momentum) can be easily understood with a bit of Newton-era calculus.

So what to do... it turns out that most markets are efficient enough that their large cap markets are unlikely to be worth the risk of active fund management (although the FTSE100 may be an exception). There is a good case for active investment in small caps in theory although in practice this has worked best outside the US. Liquidity issues suggest that a closed ended vehicle would be best. Then there is the question of whether charges make the small over large premium investible...

Even if most markets most of the time are efficient enough, there is plenty of room for inefficiencies. If one is going to refuse to think of the value of one's investment and simply put faith in "the efficiency of the market" then you'd better hope you are not investing in one of the periods or markets that is NOT being efficiently valued. This thought was behind my first ironic post on the current thread.

Personally I prefer not to hope but to use my skills and knowledge to the best of my ability.

GS

[GoSeigen]

either you're not investing optimally or you think you know something the rest of the market doesn't know.

And a false dichotomy, and plain wrong in fact. The market does not price optimally, it prices based on the level the most stupid trader currently wishes to trade at. Why this is not blindingly obvious I have no idea. Very simple example: say I think a security is worth 104p. As a canny investor I am not going to go out there and pay 104p to buy it! There is someone willing to sell it to me at 16p. So I don't say to them, hey these are probably worth 104p, let's agree a price much closer to that because the market is efficient after all. I happily buy them at the offered 16p. Then the "market" says that I think they are worth 16p and the seller thinks they are worth 16p. NO! That is just the price we traded at. My real valuation of them was 104p but I bought them for 16p because someone was happy to sell at that price. The current trading price tells you nothing about the value of an investment and nothing about the market's valuation of an investment. It just tells you the price the dumbest person at the time is happy with.

I guarantee, the moment an investor figures this out properly for himself his investment performance will improve.

GS

What if this "stupid trader" thought the share was actually worth 4p? In their eyes, the one paying 16p is the dumb one?

They are stupid by definition -- the so-called "dumb money": the people who sell at the bottom and buy at the top (who tend to be retail investors). So they may think this but will soon discover their mistake when the price rises from 16p.

[Decent explanation of Dumb and Smart money.]

How does this not work both ways? Surely there are typically 100s or 1000s of traders in any particular share on any particular day, not just you and some idiot?

I hope I was not suggesting there was only one smart and one dumb trader! [I try to be the smart trader, you disagree and that is your prerogative, but the returns on the seven portfolios I manage range between 11.8% and 18.6% CAGR over 12-20 years, so I don't think I am buying high and selling low].

Clearly there are many traders but as I hinted above, collectively those traders who tend to sell at the bottom and buy at the top are IMO more inept investors than their counterparties!

GS

[NotSure]

I hope I was not suggesting there was only one smart and one dumb trader! [I try to be the smart trader, you disagree and that is your prerogative, but the returns on the seven portfolios I manage range between 11.8% and 18.6% CAGR over 12-20 years, so I don't think I am buying high and selling low].

With your track record, I am not going to deny you are smart (or that I am dumb). But this is the passive board - I do at least feel that I am not so dumb as to think I am smart. Over the least 12 years, WVRL has a CAGR or 12.96% (I cannot find figures for 20 years - not sure VWRL is that old, but 20 years ago, much like 12 years ago, was a good time to start). The only smartness required for the 'I admit I am dumb' diversified passive approach was avoiding dumping after a bad patch, then buying back after a recovery.

But well done - I too am an engineer, and active investing has great appeal as a 'pastime' for want of a better word - certainly beats sudoku - but I have learnt that for me (and likley many like me) achiving an alpha of one will have to do

[Lootman]

I hope I was not suggesting there was only one smart and one dumb trader! [I try to be the smart trader, you disagree and that is your prerogative, but the returns on the seven portfolios I manage range between 11.8% and 18.6% CAGR over 12-20 years, so I don't think I am buying high and selling low].

With your track record, I am not going to deny you are smart (or that I am dumb). But this is the passive board - I do at least feel that I am not so dumb as to think I am smart. Over the least 12 years, WVRL has a CAGR or 12.96% (I cannot find figures for 20 years - not sure VWRL is that old, but 20 years ago, much like 12 years ago, was a good time to start). The only smartness required for the 'I admit I am dumb' diversified passive approach was avoiding dumping after a bad patch, then buying back after a recovery.

But well done - I too am an engineer, and active investing has great appeal as a 'pastime' for want of a better word - certainly beats sudoku - but I have learnt that for me (and likley many like me) achieving an alpha of one will have to do

I am not sure that terms like "smart" and "dumb" are that helpful. After all when was the last time you met someone who thought he wasn't smart or, worse, thought he was dumb? At best that is only something that can be judged after the fact.

As for GS's claimed returns, we have no way of knowing how those are computed or how much risk or leverage he took. I have a few US equity funds that have returned 15% annually for a dozen years now, and I did not have to make any effort at all. That time period was benign and probably not representative long-term.

Investment internet boards are full of people claiming to "beat the market" blah blah. But we all know that most people cannot achieve that, hence the attraction of getting a market return with zero effort and at close to zero cost. Let the self-styled "smart" folks play their zero sum game and all claim to have "won".

[GoSeigen]

I hope I was not suggesting there was only one smart and one dumb trader! [I try to be the smart trader, you disagree and that is your prerogative, but the returns on the seven portfolios I manage range between 11.8% and 18.6% CAGR over 12-20 years, so I don't think I am buying high and selling low].

With your track record, I am not going to deny you are smart (or that I am dumb). But this is the passive board - I do at least feel that I am not so dumb as to think I am smart. Over the least 12 years, WVRL has a CAGR or 12.96% (I cannot find figures for 20 years - not sure VWRL is that old, but 20 years ago, much like 12 years ago, was a good time to start). The only smartness required for the 'I admit I am dumb' diversified passive approach was avoiding dumping after a bad patch, then buying back after a recovery.

But well done - I too am an engineer, and active investing has great appeal as a 'pastime' for want of a better word - certainly beats sudoku - but I have learnt that for me (and likley many like me) achiving an alpha of one will have to do

Smart and dumb money are not personal terms -- so I'd not want to put any individual in that box, but I do think investors should try their best to be in the smart camp. Otherwise why invest -- just give your money away!

Alpha of one is not great if the chosen market does not perform [FTSE??] but individual stocks or sectors within it do.

I get the point about this being the passive board, but I repeat, my initial comment on this board was merely a remark on the irony of people asking which index is best for a so-called passive strategy**. However, I'll bow out of this thread now and let passive investors quietly discuss which tracker will perform best.



GS
e.g. I'd even go so far as to say that passive is active** ( it's and active choice both of index and the fact you don't care about price): by going for passive without care for valuation, investors are actually CHOOSING to buy high and sell low -- why? because so called smart-money active investors will sell individual stocks high to those trackers and buy other individual stocks low. [aka a stock-picker's market] The "passive" tracker investor doesn't care what price he buys or sells the individual shares at, he's only focussed on the basket. Also, many of the dumb money tracker investors will actually buy the entire basket at a high and sell it at a low.

[Lootman]

my initial comment on this board was merely a remark on the irony of people asking which index is best for a so-called passive strategy**. However, I'll bow out of this thread now and let passive investors quietly discuss which tracker will perform best.

It's a perfectly reasonable question. But if it helps, rephrase it. What is the best performing asset allocation? Which markets provide the best returns?

A simple example. The S&P 500 index had an intraday low of 666 in March 2009. It is currently at about 4350. If you bother to work that out it comes to an annualised return of 17% a year, before dividends. Throw in the dividends and that is more like 19% annualised from an index fund. There was also a currency gain on top of that for a sterling-based investor which takes you over 20% a year. So there is a case of a "passive" approach beating just about every active investor whilst spending almost nothing and never getting out of his armchair.

So you don't have to be an active investor, with all the effort, risk and luck that implies, to have gotten an outstanding return from a passive approach. You merely had to get your high-level allocation right. Get it wrong and you might be stuck with the pedestrian performance of the FTSE-100 over the same period.

Of course periods like 12 years and 20 years (since the dotcom low) are favourable time periods to select, but I used those because those were the time periods you chose to cite for your own efforts.

The reality is that your return is generally beta plus alpha, and for most people the beta is the larger number whilst the alpha can even be a negative influence.

[AWOL]

GoSeigin, I think we actually agree more than disagree, it was just the way that your position was stated earlier made it look like there was a dichotomy but it turns out to be a false dichotomy.

For example, I am an increasingly passive investor because I am worried that arrogance will lead me to believe that I am smarter than I am which could cost me a lot of money. I do believe that all equity markets are inefficient. I get the impression that you suggest that the market value isn't baked into the share price. However having read more I think I have a belief that is broadly the same as yours which is that there are other ways to value a business other than market value and it goes hand in hand that if markets are inefficient then these valuation methods will sometimes indicate that an asset is mispriced. If an active investors can exploit these inefficiencies and incur excess return (alpha) from them in excess to his costs then active investing can win.

I agree with all of that. It is just saying that markets are not efficient. It is the reason that I still have active holdings in small caps, PE, and Asia although I am increasingly inclined to reduce these and accept that I am more relaxed with the wisdom of markets than my own wisdom these days and likely to be increasingly so as my brain ages. This is where we definitely differ and that's because we are individuals with individual situations. I have outperformed the market in my investing life but when one has enough why risk it all in concentrated positions and big bets.

Here's another area where I suspect you will agree. Index investing isn't truly passive. Indices have rules around them that define how they measure and asset allocate to the market. They may have committees making decisions too but even passive rules are still actively chosen and exclude parts of the market. They have limits on the size of the index e.g. Wilshire 5000 Total Market Index, S&P500, Russell1000, FTSE100, etc. Other equity is private so the indices don't capture them. There is also the decision of which index and index provider e.g. FTSE, S&P, MSCI etc.

However in practice I think most index investors would be comfortable with owning MSCI World or FTSE World or AWI and that they will get market returns with very little deviation. The global index question is really "does one want EM or just DM equities?" Personally I am happy with the MSCI and FTSE developed market indices. I am sceptical about EM and have made an active asset allocation decision to limit my exposure to a conservatively run Asia IT.

Where I think the difference lies is your confidence that the average investor can get above average returns by actively investing. I don't think that's likely in the long term. In active investing there will always be winners as well as losers. The stats show there are more losers than winners in retail investment, and fund managers don't look that smart either.

I also think there is little evidence that being smart drives higher returns.

[JohnnyCyclops]

Many years ago now there was an article on the Motely Fool which looked at the historical yield of different indices in the UK and as a result I invested in the FTSE250 for quite a while as opposed to the FTSE 100.

There are many more indices available now does anyone know where they could be compared or has seen any articles that have looked at this lately?
I'd be interested to see which indices have done well over the last decade for example.

Thanks

Jon

Here are the FT URLs for the TR of a bunch of indices. Not checked if all still active. FT moved a bunch of its data behind the paywall but not this (yet!). Substitute the T for either D(ividends) or P(price/earnings) in the URL, so UKX.D or UKX.P.

The interactive charts are behind the paywall, I believe.

FOR FT SITE:
T = Total Return
D = Dividend Yield
P = Price Earnings Ratio

FTSE 100 TR : http://markets.ft.com/research/Markets/ ... =UKX.T:FSI

FTSE 250 TR : http://markets.ft.com/research/Markets/ ... =MCX.T:FSI

FTSE 250 Ex-IT TR : http://markets.ft.com/research/Markets/ ... MCIX.T:FSI

FTSE 350 TR : http://markets.ft.com/research/Markets/ ... =NMX.T:FSI

FTSE 350 Ex-IT TR : http://markets.ft.com/research/Markets/ ... NMIX.T:FSI

FTSE 350 HY TR : http://markets.ft.com/research/Markets/ ... =HIX.T:FSI

FTSE 350 LY TR : http://markets.ft.com/research/Markets/ ... =LIX.T:FSI

FTSE Small Cap TR : http://markets.ft.com/research/Markets/ ... =SMX.T:FSI

FTSE Small Cap Ex-IT TR : http://markets.ft.com/research/Markets/ ... SMXX.T:FSI

FTSE Fledgling TR : http://markets.ft.com/research/Markets/ ... =NSX.T:FSI

FTSE Fledgling Ex-IT TR : http://markets.ft.com/research/Markets/ ... NSIX.T:FSI

FTSE All Share TR : http://markets.ft.com/research/markets/ ... =ASX.T:FSI

FTSE All Share Ex-IT TR : http://markets.ft.com/research/Markets/ ... ASXX.T:FSI

FTSE AIM All Share TR : http://markets.ft.com/research/Markets/ ... =AXX.T:FSI