Gallery:Step 1|12-Step Painting

A Recapitulation of the 12-Step Recovery Program for Active Investors

Gallery:Step 1|12-Step Painting

It is possible to invest and relax without fretting over the ups and downs of the market. This 12-Step Program has explained many advantages of passive indexing over active investing. Investing in this passive approach provides freedom from stress, anguish and the panic of active investing. Remember, indexing is not designed to be a quick fix and does not carry the seductive quality of gambling or day trading. This approach neither has the sizzle the media likes not does it feed the adrenaline rush of chasing returns. Active investing often leads to lost opportunity. Like most things of value in life, passive investing takes discipline and time to reap the rewards. It is the most intelligent and prudent way to build wealth over the long run. Indexing is a journey, a lifestyle, a process based on a solid academic foundation of empirical research. Look again at this quick review of this 12-Step Program. It substantiates the case for passive indexing by demonstrating the following:

• It is virtually impossible to beat a market over time through active investing.

• Indexing is backed by Nobel laureates who have provided unbiased, rigorous, empirical research, most notably Modern Portfolio Theory.

• Stock pickers are analogous to gamblers who rely on feelings and emotions when making bets.

• Time pickers or market timers move money in and out of different investments in an attempt to profit from short-term cyclical events, which is a futile endeavor.

• Manager picking is not a reliable practice because the past performance of money managers does not predict their future performance. Star money managers fall from their stature sooner or later, since their stellar performance is attributed to Lady Luck rather than skill.

• Style drift is detrimental in maintaining an efficient portfolio because it changes the portfolio’s risk exposure. This is a problem when risk exposure has carefully been chosen based on an investor’s predetermined risk capacity.

• Silent partners in active management diminish an investor’s wealth by eating large slices of the investment pie.

• Understanding riskese, the language used to discuss the relationship between risk, return, and time is essential to engaging in the ownership of risk.

• To achieve above average returns, assets must be exposed to above average risk over a long period of time because of the relationship between time, risk, and return.

• Index funds are based on a long history of data dating back to 1926. Knowledge and understanding of this long-term historical data helps investors make intelligent decisions on portfolio asset allocation.

• Each investor has a personal risk capacity, a key component in choosing a portfolio.

• The mixture of indexes in a portfolio or the asset allocation accounts for 100% of the variance of long-term return. Asset allocation is the most important decision an investor can make.

• The most efficient way to invest is to hold a portfolio comprised of global diversified index funds.

• Dimensional Fund Advisors (DFA) offers the highest rated, most efficient and lowest cost institutional funds, now available to individual investors through registered investment advisors.