Monday, November 4, 2013

Great Point From Prechter About Indexing/Diversification

"In a tribute to the tailwind of a bull market, Fama’s emergence from disrepute was enough to earn him a share of this year’s prize. But the next major wave down in stocks should prove more devastating to the idea of rational markets. When stocks move below the 2009 lows, many mathematical models will fail, just as they did in 2008. Various wonders of modern financial engineering, such as Sharpe’s Financial Engines, will not be far behind. New studies attesting to the potential for extreme market moves and long periods of undervaluation will warn about the hazards of leverage and diversification. Indexation will be branded a bad strategy because it locks people into falling markets, induces them to ignore differences among individual companies and creates an intellectual detachment between investors and their holdings. Market action will reinforce ideas of non-rational markets."

No comments: