Aug 6, 2013

Cory Diary - Index Returns

I have read the 2nd investment book this month that sing the praise of Index Investment. There is a chart which indicate roughly a "Sine Wave" chart of the index over a period of 10-20 years. A diagonal arrow drawn across it points up.

Agreed the management cost of the index fund is low.
Agreed that many funds are suckers.
Agreed needs to be "savvy" enough to try to pick right stocks.

If we use STI Index from 1987-2013, compounding the return continuously, you will get 5.4% returns annually. Not bad !

Few things to watch.

We are measuring from a low trough base to a recent tip high. No one will sell everything at one go nor buy everything at one go either. So on paper we are taking the maximum potential to compute 5.4% which is kind of misleading.

Some chart uses few cycles of waves to extrapolate index returns over says 26 years to beats average returns for the next 30 years. If you have observe closely for the first 15 years, the returns are miserable.
Who can says 15 years not long term ?

I am not saying index investment is bad till i think through again on the maths. At the meantime, think about it with me.

Cory
6th August 2013

4 comments:

  1. Hi Cory,

    Below is a chart of how SPDR S&P 500 ETF (SPY) fare against S&P 500 index ($INX) since inception.

    https://fbcdn-sphotos-g-a.akamaihd.net/hphotos-ak-frc1/477170_3697574839645_54263497_o.jpg (Courtesy of money.msn.com)

    The correlation is almost 1! Thus you literally get index returns!

    There are US trading accounts (http://etfdb.com/type/commission-free/all/) that allows you to buy certain ETFs for ZERO commission, thus reducing the costs even more!

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  2. Zero commission ! i like that. What's the catch ?

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  3. no catch... different brokers different commission-free etfs.

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  4. Interesting. Maybe they will earn from managing the ETF fund.

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