Sunday, June 18, 2006

What You Know Can Hurt You

What you trade is every bit as important as how you trade. In spite of this, we see from volume figures that the majority of traders stick with the tried and true familiar stock indices. While these provide liquidity, do they provide performance?

In fact not. The more familiar the stocks, the worse their performance during the recent bull market.

For example: Since May, 2003, here have been the returns from various indices:

S&P growth stocks (IVW): 22%
S&P value stocks (IVE): 53%
S&P 500 Equal-Weight Index (RSP): 65%
Russell 2000 Index (IWM): 74%
German Index (EWG): 99%
Japan Index (EWJ): 101%
Emerging Markets Index (EEM): 153%

Chances are good, if it was a stock or market familiar to you, it has underperformed. Large cap growth has underperformed. The U.S. has underperformed.

Ask yourself where hedge funds have put their money to work; then ask yourself where Joe Investor has parked his mutual fund money.

Markets reward the assumption of risk, not the pursuit of the familiar.