Long Term Passive Investment Strategies as a Part of Pension Systems
(ProQuest: ... denotes formulae omitted.)IntroductionThe effectiveness of long term investing has been a main topic of various theoretical as well as practical studies. A lot of academicians and financial professionals are supporters of passive investment strategies such as buy & hold or indexing. On other hand there are some studies that show that there are some active investment strategies based on stock picking or market timing, that are able to record superior results.Malkiel (2012) and Bogle (2010) came to conclusion that index investing is as effective as active managed funds in long term. It was proven that on a 16-year time horizon, index funds achieve same results as actively managed funds. These findings have been supported also by other publications. For example Siegel (2014) analysed whole history of U.S. share market and he came to conclusion that passive investment strategies are efficient despite some market collapses, but a long time horizon is needed. A similar conclusion was reached by Graham (2007, 2008).Most of authors support buy & hold strategy, although many of them claim that it should be supported by cost averaging effect. The cost averaging effect limits negative effects of market crashes. The investor buys stocks on a regular basis, regardless market development. If stock market collapses, investor buys stocks at lower prices which results in a lower average purchase cost. Positive results of long term investing using cost averaging effect were presented also by study of Edelson (2007).A detailed analysis of selected long term stock market investment strategies as well as comparison of passive and active investment strategies was conducted also by other authors. For example Pastor and Stambaugh (2012) focused on declining effectiveness of actively managed investment funds. French (2008) came to conclusion that the typical investor would increase his average annual return by 67 basis points over 1980-2006 period if he switched to a passive market Lye (2012) analysed differences between growth and value stocks. Cambell, Polk and Vuolteenaho (2010) analysed systematic risks of stock investing.One of newest contributions to discussion was presented by Fabozzi (2015) who analysed current state of U.S. Pension Benefit Guaranty Corporation (PBGC). He concluded that some changes in investment strategies of funds should be made. He also advises that PBGC should introduce a benchmark for pension fund investments.Some arguments in favour of passive investment strategies were presented by Wingenfeld (2013) who talks about five specific qualitative arguments that are eligible to be a theoretical proponent for passive portfolio management. This topic is in centre of attention of some of Chinese economists as well. For example Wang, Beland and Zhang (2014, 2014) warn that there is a pension system missing in China. It could become a huge problem due to rapidly aging Chinese population.1. MethodologyIn this paper, effects of long term investing over a 30-year time period are analysed. This time horizon enables inclusion of one of European share markets into analysis, as European share indices didn't exist before 80's. The 30-year time horizon is also a usual time of involvement of an individual in a pension scheme.The effects of long term saving and investing on time horizon of last 30 years are examined. The American S&P 500 stock index is used, as American stock market is most liquid one, with a well-documented history. It consists of various share companies across all of sectors of U.S. economy. It also reflects relation between U.S. share market and U.S. economy very well. It is very close to theoretical concept of optimal portfolio. The long term investing in S&P 500 will be compared to long term investing of risk-free short-term securities. …