Gajah

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    • Thu Jun 19th 11:37 AM
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      Why Index Investing Isn't Passive Investing
      To answer your point about the efficient market hypothesis: it assumes that all available information is included in the share price. I think the amount of information available about a company, even to the people running it is very limited. Therefore investors often buy stocks based on information that is not relevant, giving them false confidence. Hence the dismal performance of actively managed funds.

      Somewhere there is a balance between knowing nothing and thinking you know everything there is to know. I suppose the reason the 'exclusive/selective' indexes outperform the 'real benchmarks' in the long-term is that they are based on information with an optimal level of detail: you know big companies will tend to stick around. For the rest, you don't know, right? Did you see the credit crunch coming? Most bank executives sure as hell didn't!

      As for underperformance during a bear market and outperformance during a bull market: I think most stock trading is speculative. Probably 80% of a company's shares will remain untraded for a year, whereas 20% of the shares are traded perhaps 10 times, explaining a share turnover of 200% per year. Essentially, only 20% of a company's share capital may be 'in play', thus setting the price.

      Because companies in an 'exclusive/selective' index are very liquid (and the index itself is traded too), they are ideal for speculating and therefore more suceptible to market sentiments, making the troughs deeper and the peaks higher.

      Those are my thoughts as a happy and relatively ignorant owner of 'exclusive/selective' index funds.
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