Does a Random Way to Get Rich Work?

By in Economics, Investing | 4 comments

 Is it Possible to Invest and Get Rich With Just 2 Asset Classes? And Other Investing Thoughts

Every so often, I come across outstanding articles to share. Each of these posts answers a particular investment question. From technical investing, program trading by the pros to Sit’s exploration of how to classify your house, there are a potpourri of choices. My favorite is Bret Ahrends WSJ article, “A Random Way to Get Rich“. His investment claims are audacious, and throw hedge funds and most investment managers under the bus. If his claims are correct, a portfolio with just 2 funds can outperform the rest!

 

wsj, us news, rick ferri, incidental economist, wise bread

 

Harry Sit of the Finance Buff asks, Is Your House an Asset or an Investment? Personally, when calculating our family net worth, I include our home because I like to see a bigger net worth. But, I have a trick, I depreciate the value, so I don’t list it at market value. It’s my way of trying to justify the reality that if we needed to liquidate all of our assets for some reason, I would be loathe to sell our home and live on the proceeds (unless there wasn’t an alternative).

Bret Ahrends in the WSJ magazine wrote A Random Way to Get Rich (Could Investors Do As Well Picking Stocks While Blindfolded?). I read this article several days ago and am still thinking about it. The most stunning part of the article asked the question:

“The best investment benchmark for comparing performance can be found by combining 80 percent of the return from the MSCI All Country World Equal Weight Index and 20 percent of the return from Treasury bills. This, in effect, is what investors could have earned if they had just fired their money manager, put 80 percent of their money into a random collection of stocks from around the world and put the other 20 percent into Treasury bills.

Over the past 10 years, such a portfolio—rebalanced annually—would have gained 11.2 percent a year. According to eVestment, of the 30 percent of hedge funds that survived on its database over that time, 91 percent performed worse.”

The Incidental Economist explains The Law of Diminishing Marginal Utility. This basic economic concept is taken from the new Microeconomics Made Simple, by Mike Piper and Austin Frakt. As a college econ major, I’ve been fascinated with this law (although I don’t think you can get arrested if you don’t follow it). Learn how it applies in most aspects of your life. And, buy the book, even if you already know about Microeconomics, it’s a nice refresher.

Rick Ferri writes about how Technical Analysis Drags Down Performance.

“Researchers Brad Barber and Terrance Odean published several papers beginning in the late 1990s that document the actual performance of thousands of individual investors who traded their own accounts. They found that those who traded more underperformed than those who traded less.”

Alaina Tweddal wrote for Wise Bread, If you Think the Housing Bubble Was Bad; Check Out These Other Crazy Investment Bubbles. I’m overly interested in bubbles because when they break, they offer superb opportunities for investing. If you pay attention to valuations, and understand when an asset becomes overvalued, it’s only a matter of time that the tides will turn. After a bubble bursts, it’s a great time to go in and invest.

I answer this question for U.S. News and World Report Readers, Must I Hold Bonds in My Investment Portfolio? I discuss the place of fixed income investments in your portfolio and give 4 ideas for the fixed portion of your asset class allocation. Of all of the fixed alternatives mentioned, Government I bonds are my favorite. But unfortunately, I bond investments have their drawbacks.

Investor Junkie asks and answers the question, Is the Stock market Rigged? If you’re interested in the “high frequency trading” discussion in the media, learn about the pros and cons of this issue. Here’s a preview of how high frequency trading works:

“Having just a millisecond or two advantage gives the opportunity for trading firms to see information and stock prices, and for a very fast computer to buy or sell before the average investor can take notice.”

Which article is your favorite, and why?

    4 Comments

  1. Thanks for the post and sharing the article on WSJ. I just finished reading that too and it’s got me thinking. When I started investing myself I did something similar sort of choosing stocks in random based on a group of stocks that were high performers. I held on to them (through the recession) and the returns have been quite positive. I am curious now on how that would have compared to one provided by money manager.

    Jason @ Phroogal

    June 18, 2014

    • HI Jason, I would like to do some investigating into historical returns of the 2 fund idea in Ahrends article (the all world fund and a cash or short term bond fund). I plan to calculate annualized returns over various time periods and then compare with other index and actively managed fund. His idea is interesting, but I’d like to see some empirical evidence of his hypothesis.

      Barbara Friedberg

      June 20, 2014

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