ETFs are not idiot-proof – just dumb investing
Lately, we’ve seen an escalation in marketing by providers of index funds, and truth has been the first casualty. To our way of thinking, index investing is simply dumb investing, geared to know-nothing investors. But if you’re reading this, then that’s not you.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Richard Endersbee
:
Hi Roger,
Do you agree with the comments in the Wall Street Journal article, The Dying Business of Picking Stocks? In particular the comments from Mauboussin with regard to zero alpha in the market and the difficulty of active managers outperforming if more funds move to passive indexing?
It seems like a blended portfolio of both ETF’s and active managers with a robust asset allocation strategy is the best an investor can do? You can capture the low cost returns of asset classes with ETFs and give your investments some potential outperformance upside by “hopefully” selecting active managers that can outperform the markets (even though the statistics seems to suggest otherwise). Overall portfolio costs in a low return world can be lowered well below 1% with a blended approach incorporating the use of ETF’s across a portfolio within each asset class.
For the asset allocation piece you could effectively take the average weights for the Future Fund, Aus Super, Vic Super and a high quality Wealth Managers SAA’s and get quite a well guided portfolio. The above mentioned managers publish their SAA’s publicly and are thus easy to follow. Although individual investors cant get access to the same investments the billion funds have access to – you can get pretty close through indexs and active managers.
Thoughts?
Roger Montgomery
:
Hi Richard, impossible to follow, for example, the future funds exposure to private equity or direct infrastructure. I believe the idea that active management would be made more challenging by the continued growth of index investing is itself challenging. The greater the number of people who believe they shouldn’t even bother, the greater the profits for those who stick to active investing.
Steven Tanner
:
Nice read Roger and I agree completely, but I have one question for you as I don’t think the article gave a concrete answer, do ETFs more specifically an index ETF have any place in an investment portfolio ? You did mention Buffets advice that they are for know nothing investors (of which there are many) so just to clarify, are index ETFs suitable for those people ? As I don’t think you really gave your opinion.
Roger Montgomery
:
I think an ‘unadvised’ investor who really does know very little…is in big trouble. Hopefully the unadvised investor, who does literally know nothing, would be best served seeking a recommendation for a good adviser.
carl.poingdestre
:
I sticking with you and the team. Keep up the good work.