Monday, February 05, 2007

Another academic, pro-indexing study

"The idea of "local knowledge" – or "investing in what you know" -- is popular stock-picking advice that doesn't appear to hold true for individual investors, according to new research from the University of California, Berkeley's Haas School of Business," according to a recent press release.

"In a study of almost 1 million transactions from more than 43,000 households, Haas Assistant Professor Mark Seasholes investigated whether investors who buy stocks of local companies have superior information. He found that individuals who buy local stocks fail to outperform the stock market, suggesting that these investors had no superior information about the companies. Seasholes also found that overall, stocks bought by individuals tend to go down, while stocks they sell tend to go up."

"As investors revisit their stock portfolios with the new year, Seasholes says his findings suggest they should consider index funds."

I haven't read Seasholes paper (which you can link to from the press release), but it seems to me that individuals' poor investment returns don't argue only for indexing. Instead, why not consider professional investment management?

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