I think we’re in more furious agreement than a casual bystander might feel, but I’ve got a slightly different perspective on some of this.
If we're talking about diversification, then your other assets have to be taken into account.’
Indeed they do, and if you had property, gold bars, oil barrels and a decrepit but rich mother in law then it matters little whether you miss out on the diversification of emerging markets in your stocks or over-weight in tech stocks and Pepsico. But when we’re talking about principles to guide investing, if the choice is ‘omit emerging markets’ or not, or ’over-weight tech’ or not, all your gold etc is irrelevant since omitting emerging markets or over-weighting tech is not optimal (and usually easily achievable) diversification.
You buy the one likely to have the best risk adjusted returns I think since they’re in the same asset class. That leaves the only argument in favour of QQQ as past returns
You judge the risk adjusted returns in light of the past returns.’
You can, but those measures won’t necessarily be repeated so you wouldn’t want to trust them, and I don’t think you have to. Being more diversified in stocks reduces risk. The best estimate for the return of any stock will be the market return, since any better or worse return occurs less commonly (all of ‘aboves’ and ‘belows’ contributing to the market return). So if you can reduce risk (with diversification) you should be predicting better risk adjusted returns; you don’t need past returns to show that. It is the efficient market hypothesis which one accepts as largely applying, or you don’t believe it has any merit.
You could probably find a stock with a long history of better risk adjusted returns than the total stock market, but that surely wouldn’t convince you that it was a better prospect from now forward in terms of risk adjusted returns, as the risk is far greater than market risk; in fact its risk is market risk plus the idiosyncratic risk of that company (due to the sector it’s in, the genius CEO who might die or the pollution it might cause in Bhopal).
And each person will have a level of risk they feel comfortable with;…this will depend on the risks of their other assets (and the requirements that these are to fund)’
Yes, one might be in a position to take more risk than market risk, hoping to shoot the lights out but happy to go under (the market) otherwise. But there was nothing in the OP to suggest that; indeed it included ‘liquidity’ and ‘minimum counter-party risk’. It was hinting at risk reduction, not extra risk.
‘That's saying that the behaviour of fund investors is the problem. Most people are bad at timing the market.‘
Yes, exactly; that’s what I was warning against with ‘performance chasing’ and recency bias.
No loss not knowing Ben Felix, just another talking head. When I tried to post the link it embedded the youtube video, so I left it out.
‘We all use past performance to guide us. People invest in the stock market because its past performance is better than a savings account, or inflation-linked bond.
Then we ought to re-think it. You don’t need past returns to tell you about stocks, bonds and cash. There’s little risk with cash as you get your money back; there’s more with bonds as you may lose your money; and even more with stocks where there isn’t even a promise to return your money. If you know that people expect more return if they take more risk, you don't need to know past returns, but past volatility is useful. Past returns can be a hint that stocks will likely meet your future needs but bonds won't, but that's different from knowing QQQ was better than SPY.
