If I had been close to retirement, I wouldn’t have been so heavily allocated in equities, that’s another thing the B&H advocates say. While I was disgusted that the money I put in my IRA seemed to disappear almost as soon as I put it in, I kept at it, and my biggest losers were averaged enough by new contributions that they are now my biggest gainers.

I believe a B&H strategy will work in the long run. But I will say that in my taxable account, which I beefed up tremendously in the downturn, I only do ETFs so I can have stop loss orders on them, and I am not scared to take a profit, pay The Man his cut, and run.

I can agree with that. But what if increased complexity made a significant increase in annualized returns?

I believe that preventing disasters is all that’s necessary for long-term wealth. But that’s okay – we don’t have to agree. There is no single best way to handle one’s money.

In order for an options strategy (collars included) to earn a greater return at a given level of risk than, say, a simple stock/bond allocation, the options you’re buying must be underpriced and/or the options you’re selling must be overpriced.

For reference, I’m not saying that options strategies are a bad idea, per se. I’ve just never seen anyone make a compelling case that they reduce risk at smaller cost to expected return than simply increasing the fixed income or cash allocations in a portfolio. Meanwhile, getting involved in options certainly increases the complexity level over simply controlling risk via asset allocation, and, all else being equal, increased complexity is obviously not a good thing.

The data is irrefutable: professional money managers cannot outperform the markets on a consistent basis. All they do is tack fees onto that below average performance.

One of the sad truths on Wall Street is that the salespeople are out for themselves. Sure there the honest minority, who understand and respect the meaning of a fiduciary responsibility, but those are difficult to find.

As long as there is a conflict of interest – and charging fees is that conflict – the customer is not going to be well served by professionals.

“To be able to earn a return better than that provided by a long-term, buy & hold indexing strategy, we have to either: get lucky, or outsmart the market in some way:
1. picking stocks (or other individual securities), or
2. timing the market”

First you do not have to get lucky or outsmart the market. All you have to do is avoid debacles. Profits are good. Small losses are acceptable. Killer losses destroy the best laid plans.

Second, there is no need to pick stocks or time the market. If you want passive investments, go for it. No need to do anything different when choosing investments.

By adopting conservative option strategies (specifically the collar), an investor can earn good, but limited, profits when the markets rise; earn a small profit when the markets are stagnant; lose a small amount when the markets fall; and still have small losses when the markets tumble. Those tumbles don’t occur that frequently, but are devastating when they do. It’s easy to get complacent (technology bubble) when markets are rising.

Owning portfolio insurance is a smart idea. It means the investor is prepared, not hoping to get lucky.

There is no reason not to learn how options work. Then – and only then – can an investor make the decision that ‘using options is not for me.’

I appreciate the opportunity to present my thoughts here. Thank you.

http://blog.mdwoptions.com/options_for_rookies/2008/07/example-of-a-co.html

Thanks for saying that much, Mike. I am grateful.

But to be honest, I see the misinformation spread by the financial services industry (about active management, picking stocks, etc) as a far larger issue. And until that battle is won–which I doubt will ever completely happen–I don’t foresee myself taking on any other issues with my writings.

I am of course disappointed to hear this. But that’s of course your call.

My take is that it is this way of thinking that puts the good stuff in the Passive model in jeopardy. Ultimately, people are going to go with what they think works. During a wild bull, it was possible to make it look like Passive could work. Now that that’s no longer the case, we’re going to see more and more people coming out and saying the sorts of things that you are noting in this blog entry. My thought is that we have no choice but to fix what is wrong in the Passive model if we hope for the model to survive to help investors of future days.

It’s not by attacking the attackers that we prevail. It’s be taking a good look at the man in the mirror and fixing the things that we really are able to fix. It’s harder work from one way of looking at it. But it’s work that pays big dividends (in my view). My view is that it is those of us who are seeking to fix the Passive model who are the true Bogleheads.

Rob

Perhaps passive index investing is the worst form of investing apart from all those other forms that have been tried from time to time? (Which actually makes it rather good, like democracy!)

Based on what I’ve read from Graham and Zweig, “buy and hold” seems to work when you buy the security at a greatly undervalued price and when the company provides consistent dividends.

To assume that securities can never be undervalued (EMH) is to say that investors are never irrational or acting on fear or herd mentality.

Any approach to investing will involved periods of poor performance. I am not a market timer but I’m not a buy and hold either.

My strategy has its pros and cons – like anything else in life. The issue is that folks hop around looking for the “perfect” approach…and end up in Bernie Madoff’s office.