Arnie,
It is certainly believable you are outperforming the S&P 500 as that benchmark is made up primarily of large-cap stocks. I’ll bet you hold a number of mid and small-cap stocks in your portfolio and they can make a big difference in performance.

I have a portfolio, coming up on ten years of operation, where it is ahead of the VFINX (S&P 500 equivalent) by 4.7%, but it only beats the VTSMX (total market index) by 3.6%. That is still a hefty gain on a benchmark. The portfolio is weighted toward value and away from growth. In addition it holds commodities, developed international, REITs, and emerging markets. All the holdings are ETFs so the portfolio holds thousands of stocks through these ETFs.

Lowell

Ellis :@Gary SimmsGary,

YOur points are well-taken. And that issue of laziness and lack of motivation seems to be in concert with my thoughts about it (although you haven’t offered any conjecture as to the cause).

>>>Again, this is an easy answer. Over the last 20 years the middle class has been pushed down into the lower class. Local facotries (CAT:NYSE) have forced two tier wage scales on the unions so you have people doing the same work for hald the money! Any disposable income folks happen to end up with is quickly whisked away by the advertising industry hitting us with a barage of enticements for goods and services we can not do without be it a house, car, vacation, or some other endless choice. One fellow commented he was heavily invested in rent and groceries!

You’re right, that financial literacy must precede investment education for our youth. But they must both need and want it. Without needing to create their own wealth, our kids are hardly motivated to learn about where money comes from and what it really means. Nor are they likely to be able to make much of it unless they find someone willing to pay them for their skill sets and experience with little concern for their productivity. I think we’ll see a generation of salesmen dominating the financial arena, don’t you?

>>>>One trend I’ve noted is that adults are doing many of the traditional jobs once held by teenagers, e.g., newspaper boy or girl, lawn mowing services, or working in the local fast food joint are now being done by formerly retired or currently laid off workers. The financial salespeople of the future will have a much smaller market from which to profit.

>>>>>It bothers me that my neices have never had a small business to run. Running a professional office is a major step up from mowing the grass, but the basic lessons of a small business were still learned. Kids today lack this basic experence. They are always looking for a job rather than looking for a business opportunity.

>>>>>One observation in the book, The Millionare Next Door, was that the millionares were small business owners that lived well below their means. Young people today have much less chance for wealth if they are an employee as noted inb the book, Cash Flow Quadrants.

>>>The current trend seems to be away from any defined benefit plan (my sister-in-law’s company just stopped DB plans for new hires to her company, Tate & Lisle.)

>>>The new thrust is toward 401 Roth plans which the government likes becasue it generated current tax revenue unlike the current IRAs or 401K plans.

I was impressed with Dave Ramsey’s site…and somewhat envious. Wish I could attract the crowd he has!

>>>>There are many more that need to get their basic financial life in order. You have a MUCH smaller pool from which to draw followers!
blockquote>

Investors who do not benchmark their portfolios are satisfied with self-delusion. If I don’t know how well I am performing with respect to a benchmark, then I can tell myself I am doing very well.

Lowell

I’m really surprised that the scientist in you is trying so hard to avoid the real issues here.

We aren’t reading different books. You’re reading different books! I’m very well satisfied with the common sense of my approach and am still convinced that the dilution of a portfolio with anything but the common stock of quality companies would reduce your potential return.”

I don’t think I am side stepping any argument. My contention is based on lots of research and it is simple to understand. On average, the process of stock selection, by what ever method, will not result in portfolio returns that will perform better than the market. William Sharpe showed this to be true mathematically. Keep in mind, I do use the words, on average, as there are investors who from time to time will do better than the market.

I am not critical of any specific method, although as I recall, Take $tock only did slightly better than the VTSMX over the five years I tested it. Keep in mind that I did use my own “Creme List” as an overlay when following the T$ rules so that may have added a bit of value.

If your methods are successful, and they well may be, then put the methods to the test and accurately measure the portfolio against a reasonable benchmark. If all your stock selections come from the U.S. market, then the VTSMX is a reasonable index.

If I were to use Take $tock in a taxable account, I know it would not perform as well as a well-diversified index based portfolio due to the high turnover. Jim Thomas pointed that out several times during the five-year test. I am not sure how one gets around that problem.

Lowell Herr

You continue to stay the course and ignore the point I have made over and over: there will never be a study that can do what you wish because the implementation of the methodology is personal, subjective, and variable. That fact is not sufficient cause to dismiss the thesis.

@Lowell Herr

The bivio record of the performance of investment clubs, and the “club index” cannot prove anything except for the fact that it cannot be proven! You cannot possibly hold any of the necessary variables constant in all of the clubs. You know that! So you can’t possibly cite that as a means of proving anything.

You continue to sidestep my challenge. You avoid mentioning a single point in my methodology that fails the test of logic.

I’m really surprised that the scientist in you is trying so hard to avoid the real issues here.

We aren’t reading different books. You’re reading different books! I’m very well satisfied with the common sense of my approach and am still convinced that the dilution of a portfolio with anything but the common stock of quality companies would reduce your potential return.

@Lowell Herr

It’s a shame to see, after all these years, that you pursue only those ideas that can be measured by the performance of a large body of investment vehicles and refuse to look dispassionately and with an open mind at the logic of owning shares of quality companies for their performance. And, you make no effort to justify it that would satisfy you, if you were on the other end of this argument!

Your argument, that you must have a benchmark to match and an empirical means of comparing an investment method with it in order to judge its efficacy, is like looking under a street light for your lost wallet because the light is better there than it is where you lost it!

Moreover, I have yet to hear a single point from you that would disprove its efficacy.”

I just checked the bivio record on the performance of investment clubs. The “club index” as measured by bivio, shows that investments clubs, over the past nine years, lost 5.8% annually to the VTSMX or Total Stock Market Index fund. This is the information I use to support my point that individual investors, on average, are not able to perform better than the broad market.

I know we are reading different books and research articles as we arrive at different points of view when it comes to portfolio construction and management. I’m making an extreme effort to measure portfolio return and risk for a semi-wide variety of portfolios as a way of self-testing the principles of asset allocation. I know of a few others who are doing this with fewer portfolios as a way to check on their investing methods.

Lowell

Ellis, you may be one of those rare individuals who perform better than their benchmark year after year. The question is not whether your method is successful or not. Only you can answer that question, but to do that, one must have an appropriate benchmark and then some way to measure the performance of the portfolio against that benchmark. The TLH spreadsheet is the best vehicle I know of to see how well your system is working.

I am testing the principles of asset allocation with 19 portfolios of different size and varying launch dates. The records are available on my blog.

Lowell

I do not automatically dismiss it. In fact, I gave it a try for 10 years while I was conducting parallel studies related to index investing. I learned that the individual is insufficiently skilled, or at least I am, to come up with stocks that incorporate specific asset classes of the U.S. equities market, emerging markets, developed international markets, REITs, bonds, commodities, as well as a few other asset classes. No one person can cover all those areas and that is why large endowment funds have many money managers. Even Swensen, head of the Yale endowment, recommends index investing for the small investor.

Lowell

I’m referring to books written by William Bernstein (3), Roger Gibson, Richard Ferri, Larry Swedroe, Mark Hebner, David Swensen, Michael Edesess, Charles Ellis, John Bogle, and Burton Malkiel to name some of the most prominent. If you search for those names on my blog you will find book titles.

Lowell