BillNL

Are Index Funds the Only Rational Choice?

What it comes down to - as I asked before - is what evidence can be presented that one can - exclusive of dumb luck - pick 15-stock portfolios that will do better than the index over a period of time that is not so short that dumb luck is a possible explanation of success? If someone could show me a study that demonstrated this was possible for - say - a 10 year period or longer, it would be worth considering. It's one thing to argue why Bernstein was wrong - but another to put up confirmative evidence of one's alternative position.

Are Index Funds the Only Rational Choice?

What evidence is there that the "superstocks" are all riskier stocks like Dell? It seems to me that the sort of stock that one would have difficulty in identifying for a 15-stock portfolio might be one without a lot of price history. Stocks like Novell, Dell, Microsoft, Cisco and so forth turned out to be among the superstocks that drove index returns during the late 1980's and 90's. They were great picks BEFORE they morphed into hugely successful and large companies, not afterwards when their history was - well - history. The problem with an actively managed portfolio of individual stocks is that you can't just buy and hold them over a 10 year period like you can the index. You have to know when to hold and when to fold, which is something not a lot of investors can consistently do well.

Are Index Funds the Only Rational Choice?

One thing I'd like to see is how often "intelligently selected" 15-stock portfolios with risk similar to the S&P 500 actually outperform the index. It should be possible to backtest this using QPP. One of Bernstein's points was that it is difficult to beat the terminal wealth value of the index over a given period of time (eg. 10 years) because the performance of the index is largely driven by the small minority of big-gainers in the index. Unless you manage to include one or more of them in your 15-stock portfolio you are likely to underperform the index itself. I don't see how that is easily accomplished by selecting 15 stocks based only on quantitative characteristics such as low intercorrelations and aggregate risk.