[aantix]

Feels so strange that the average investor can't outperform an index fund with low management fees.

A small investor is so agile - they can move in and out of positions. Why that agility can't be utilized to outperform a slow moving index fund, long-term?

[bluGill]

Agile is not something a small investor can win at. You can win by reading the 10k and such and then following what is happening in the real world and thus predict what will happen. You should be able to make a nice income doing this full time, but it won't be get rich, and probably won't be even tech levels. Note that I said full time. You will follow many companies and conclude the market is right and thus not do better, while what you need is the one where you can figure out in advance the company will do good/bad before the market does and thus buy/sell in advance.

Peter Lynch famously (he was then manager of the world's largest fund) got out of Gap when he noticed his daughters didn't buy anything there for school and that was his clue that they wouldn't do well next quarter. Gap as had ups and downs since. This is the type of research you will be doing all the time, trying to find a evidence of a company that will disappoint before anyone else knows. This is hard hard hard, and is always a matter of luck. Remember by the time it is public the large players already know and have acted (that is they get alerts the instant it becomes public and are first in line to act on it, technically you get the information at the same time and can act as fast but in practice you will not)

[TheDong]

All the easy alpha has already been taken by high-frequency traders and big trading firms, and once all the easy alpha is gone, you're left more-or-less just tracking general market behavior... just like index funds.

Except being more agile also means eating more fees.

[Maxatar]

It should not come as a surprise. While it's a bit of a simplification, index funds are effectively a representation of the average surviving investor...that is among all investors, index funds are the average of those who have not yet gone broke. The investors who have gone broke get culled out.

So it should not at all be surprising that index funds perform better than the average investor.

Furthermore, as far as agility is concerned, it doesn't play much of a role in the market. Almost all gains in the stock market over the course of a year come from a handful of days. For example in 2024, just 9 days account for the entire yearly gains.

[WXLCKNO]

Does average investor here imply someone who's educated on the topic and knows what he's doing?

And you're also saying investor, not trader. So moving in and out quickly doesn't matter as much if we're talking about mid to long term holds.

It also makes sense that those with the largest edge in decision making for trades would collect most of the money.

[echoangle]

Probably because no matter how agile you are, you'll never be more agile than the market. And being much slower isn't worse than being a little slower.

[aantix]

Thinking out loud here..

If the basic hypothesis is that “don’t bet against the U.S.” and that the U.S. long term, always go up, and I’m assuming most of us buy in to this hypothesis because most of us are probably holding an index fund for the S&P or QQQQ long term..

Looking at my portfolio, I just weathered the 2022-2023 storm without even looking. It could have been down 50%, it could have been 90%, I wasn’t selling. I’m all in for another 20 years.

Given that stance, why wouldn’t I just buy and hold a leveraged asset like TQQQ?

[v-yanakiev]

For plausible definitions of "average investor" in this context, it's arithmetically impossible: https://web.stanford.edu/~wfsharpe/art/active/active.htm

[paulpauper]

Some can. I have done well with leveraged tech funds.

[aantix]

Is TQQQ a long-term holding?

You could stomach the 80% draw down?

[Maxatar]

I've been holding it for close to 10 years, it's my best performing holding by a long shot. I like to hold leveraged ETFs in my tax-free investment account and TQQQ along with UPRO are the ETFs of choice for me.

[aantix]

Fascinating.

What are the black swan events for those holdings - I assume they can get margin called?

[Maxatar]

No, the reason I hold them in my tax-free investment account is because you can't trade on margin in those accounts. So the closest thing to margin you can get is a leveraged ETF. I never have to worry about getting margin called, or going into debt with a leveraged ETF, those things are not possible. I like to think of 3x leveraged ETFs as letting me take my tax free investment account and tripling it.

I can certainly lose a lot of money, the fees are substantially higher than a regular ETF (about 4x higher), and the volatility and constant rebalancing on a daily basis results in a phenomenon known as volatility drag... and yet TQQQ and UPRO have been an absolute killer over the past 10 years.

In my non-tax free accounts I hold unleveraged ETFs: SPY and QQQ.