Active Indexing Doesn’t Work With Lump Sums

I’ve found an answer to the problem presented in this article, the answer can be found in the article “How To Make Active Indexing Work With Buy More Sell Less“.

John Bogle once mentioned that he didn’t like the idea of ETFs since it made it easier for people to trade it, something that goes against his long term buy and hold strategy that works much better with mutual funds due to difficulty to trade frequently [1].

And that is exactly what I’m doing, trading ETFs, increasing commissions and killing returns. It’s very frustrating.

I outlined in the article “Earnings Yield of AAA Bonds Needs a Margin of Safety” a strategy to beat a passive indexing strategy which involved rotating funds from more expensive index funds to cheaper ones while maintaining a margin of safety based on earnings yield of AAA Bonds.

The key to this strategy’s success was overlooked though, which is the need for constant influx of new money that’s large enough to smooth out the deviations of cash required to hedge against each index fund.

What happens when you’re dealing with lump sums or influx of new money that’s too minute in amount is that small changes in AAA Bond Earnings Yield, prices of index funds and fundamentals (P/E * P/B) of index funds means that in certain months you might buy or sell a lot.

This caught me by surprise because I thought the degree re-balancing required would be much less and thus more commission-friendly.

So now that I’ve realized I don’t have the constant influx of new money required to see this strategy through, what do I do? Even though it’s painful, I’m going to exit all my index fund positions, stay idle with cash and bet aggressively into great companies I have in mind when a bear market hits. That will be the way I generate enough money to execute a NCAV stock strategy.

The question that remains, when do I exit? Exit all positions now at a loss (all positions have dropped in price since bought)? Or wait until it rises back to buying price?




Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


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