If you had a billion dollars, there’s no reason for you to care about the return of your investments at all, much less about microscopic improvements.
I don’t agree—if you have $1 billion, the marginal utility of an additional dollar is smaller than if you are normal individual investor, but the utility is still positive. More importantly, the second derivative of utility—the rate at which the marginal of utility diminishes—is much larger for an individual investor than for a billionaire. $10 million is about twice as good as $5 million for Bill Gates, but not for me. This implies, to me, that individual investors should be more risk-averse than larger investors, which supports the statement “It is never going to be worthwhile for a personal investor to attempt to beat the market”.
Could you give some specific and realistic scenarios where it would be rational for an individual investor, with at most a few hundred thousand dollars in capital, to attempt to beat the market? That’s what I’d like to discuss.
The real question is why do you consider the market portfolio (which, again, most of US residents understand as an S&P500-based index) to be the default? For historical context, it certainly wasn’t the default for saving money for retirement, say, 50 years ago.
I was under the impression that historically most were more concerned with safety than they are now, and less concerned with “beating the market”.
I’m laboring over the phrase “beat the market” so much because I believe that (1) many people think that they can do better (2) most can’t, even if they are smart (3) you shouldn’t try.
This implies, to me, that individual investors should be more risk-averse than larger investors, which supports the statement “It is never going to be worthwhile for a personal investor to attempt to beat the market”.
And, if an individual is able to (predictably) beat the market for whatever reason then it is overwhelmingly unlikely that their optimal strategy is to invest their own capital but nothing beyond that.
A relative of mine does predictably beat the market, and he would agree with you that he would make more money in the long run by investing the money of others. But he would disagree that this is an optimal strategy: his (economic) goal is to make enough money to live comfortably while doing a minimum of work. He reports a fair number of likeminded people among his acquaintances, some more successful at this than others.
I don’t agree—if you have $1 billion, the marginal utility of an additional dollar is smaller than if you are normal individual investor, but the utility is still positive. More importantly, the second derivative of utility—the rate at which the marginal of utility diminishes—is much larger for an individual investor than for a billionaire. $10 million is about twice as good as $5 million for Bill Gates, but not for me. This implies, to me, that individual investors should be more risk-averse than larger investors, which supports the statement “It is never going to be worthwhile for a personal investor to attempt to beat the market”.
Could you give some specific and realistic scenarios where it would be rational for an individual investor, with at most a few hundred thousand dollars in capital, to attempt to beat the market? That’s what I’d like to discuss.
I was under the impression that historically most were more concerned with safety than they are now, and less concerned with “beating the market”.
I’m laboring over the phrase “beat the market” so much because I believe that (1) many people think that they can do better (2) most can’t, even if they are smart (3) you shouldn’t try.
And, if an individual is able to (predictably) beat the market for whatever reason then it is overwhelmingly unlikely that their optimal strategy is to invest their own capital but nothing beyond that.
A relative of mine does predictably beat the market, and he would agree with you that he would make more money in the long run by investing the money of others. But he would disagree that this is an optimal strategy: his (economic) goal is to make enough money to live comfortably while doing a minimum of work. He reports a fair number of likeminded people among his acquaintances, some more successful at this than others.
Sorry, leaving on a trip in about an hour so I have to bow out of this discussion. But I’m sure it will come up again on LW… :-)
Aww. Well, it was fun while it lasted :-)