Quick points in defense of indexing for retirement?

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Quick points in defense of indexing for retirement?

Postby gordo » Mon Jul 01, 2013 7:18 am

My know-it-all father-in-law has been encouraging the wife to have a look at his full service investments guy to "help out" with our portfolio. Neither the father-in-law nor his investment adviser are what I would call low cost indexers. Wife is sort of laughing it off as she has complete confidence in my judgment, but nevertheless he doesn't seem to want to let it go as he sees himself as a sort of "wise old investor" who has much to teach us. He's no Warren Buffett either, mostly just a throw-darts-at-the-dartboard type who picks from a number of high cost funds hawked by his adviser, along with some simplistic stock hunches like buying Facebook at IPO, etc... Anyway, I was thinking of formulating a response, one that I wouldn't necessarily send to him directly or lecture him with, but something that would provide some simple talking points that I could use (sparingly) to defend myself when I can't simply change the topic or ask him to mind his own business.

Here's what I've got so far:

Our investment strategy is based on simple ideas like managing risk through simple asset allocation and utilizing low cost index funds that avoid high taxes, trading fees, high fund expense ratios, advisor fees, sales loads, high turnover rates, fund style drift and management changes. It is a strategy that has been proven out by over 40 years of academic research and advocated by Warren Buffet and John Bogle. It has consistently beaten well over 90% of all investors over meaningfully long investing horizons (>20 years) on a risk-adjusted basis.
Interesting facts about our portfolio:
1. Due to new funds invested as well as recent market performance, our retirement portfolio has more than quadrupled between 2009 and 2013 (July) with no meaningful change in funds, asset allocation or overall philosophy. (That is amazingly true).
2. I can tell you our retirement portfolio return (IRR) for last year (2012) to within one one hundredth of a percent: 13.99% net of all fees and taxes, without relying on an advisor.
3. At any time, I can tell you our current asset allocation between international and domestic equities versus fixed investments with a quick glance at an Excel spreadsheet as well as the future allocation plans for each year until we retire.
4. Our retirement plan includes tangible and realistic savings goals during our accumulation years and assumes a conservative 3% withdrawal rate during retirement.
5. I spend only a couple hours a year measuring and rebalancing our portfolio as necessary, which is about all the management our portfolio needs.
6. It may seem ironic, but we do not own a single share of the S&P 500 index, often held up as the quintessential stock index for comparison to actively managed mutual funds.
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Re: Quick points in defense of indexing for retirement?

Postby livesoft » Mon Jul 01, 2013 7:27 am

Just have a long-term contest with him: Whoever makes more money gets to get the other's portfolio.

Just make sure the term is long enough.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Quick points in defense of indexing for retirement?

Postby gordo » Mon Jul 01, 2013 7:36 am

livesoft wrote:Just have a long-term contest with him: Whoever makes more money gets to get the other's portfolio.


Funny and it would work if I was confident that he could actually calculate his IRR. Instead, he'd probably show me a collection of prospectuses and do a bunch of hand waving.
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Re: Quick points in defense of indexing for retirement?

Postby livesoft » Mon Jul 01, 2013 7:40 am

C'mon you would both lay the books bare so you could each audit each other.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Quick points in defense of indexing for retirement?

Postby Don Christy » Mon Jul 01, 2013 7:43 am

Just tell him you prefer an evidence-based approach and that the research clearly shows that a passively managed, broadly diversified, low cost, market-based portfolio beats active management most of the time. You'll be happy to share your research with him if he's ever interested.
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Re: Quick points in defense of indexing for retirement?

Postby ObliviousInvestor » Mon Jul 01, 2013 8:01 am

Don Christy wrote:You'll be happy to share your research with him if he's ever interested.

This is what I would do. Give him a list of good research articles supporting the concept of indexing. Ask him what research he has read that supports the idea of using actively managed funds.

I'd start with Sharpe's The Arithmetic of Active Management.

From there I'd also add:
-Rick Ferri and Alex Benke's recent paper comparing active fund portfolios to index fund portfolios.
-Carhart's classic study On Persistance in Mutual Fund Performance.
-Russel Kinnel of Morningstar's 2010 study showing expense ratios to be "the most dependable predictor of performance."
-S&P's "index vs. active" scorecards as well as their persistance scorecards (from the same link, which pretty reliably show that picking based on past performance isn't very successful).
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Re: Quick points in defense of indexing for retirement?

Postby Dick D » Mon Jul 01, 2013 8:30 am

You do not need to defend your position.
I would just tell him that you apprecate his interest and concern in your financial future. You realize his desire to help you and his daughter is a demonstration of his love. We have our own financial plan and intend to follow it. Avoid argumentation and discussion of your decision as you will not change his mind. Thanks but no thanks. Better yet have his daughter tell him.

If he brings it up in the future just repeat your statement.
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Re: Quick points in defense of indexing for retirement?

Postby IlliniDave » Mon Jul 01, 2013 8:33 am

gordo wrote:My know-it-all father-in-law has been encouraging the wife to have a look at his full service investments guy to "help out" with our portfolio. Neither the father-in-law nor his investment adviser are what I would call low cost indexers. Wife is sort of laughing it off as she has complete confidence in my judgment, but nevertheless he doesn't seem to want to let it go as he sees himself as a sort of "wise old investor" who has much to teach us. He's no Warren Buffett either, mostly just a throw-darts-at-the-dartboard type who picks from a number of high cost funds hawked by his adviser, along with some simplistic stock hunches like buying Facebook at IPO, etc... Anyway, I was thinking of formulating a response, one that I wouldn't necessarily send to him directly or lecture him with, but something that would provide some simple talking points that I could use (sparingly) to defend myself when I can't simply change the topic or ask him to mind his own business.




You could ask your F-i-L to take you by the full-service guy's house. If it's more modest than F-i-L's house say, "If the guy's such a money genius why's he living here?" If the house is big and expensive make an comment full of gushing admiration then ask F-i-L how much he's paying for the guy's "full service". :D

On a more practical level this is what I'd do. At the earlier of his next birthday or Christmas (or appropriate gift-giving holiday), give him a copy of the revised edition of Common Sense on Mutual Funds. Since Bogle is likely older than him it's possible the message will hold more credibility. It could be that underneath it all he's insecure about investments and looking to get some amount of affirmation of his own activities by having you get on board. In the meantime if you get cornered I'd just hold to the cost argument. Just tell him you don't want anyone between yourself and your cookie jar. Period. Let him pontificate, nod and smile, but when the professional management recommendations come up, revert to the cookie jar.
Don't do something. Just stand there!
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Re: Quick points in defense of indexing for retirement?

Postby TomatoTomahto » Mon Jul 01, 2013 8:36 am

At my gym, most of us follow the advice not to discuss politics, religion, and investing philosophy. We're supposed to not discuss sex either, but it's too entertaining to leave out. I think it's not a bad idea to limit family topics also.
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Re: Quick points in defense of indexing for retirement?

Postby JamesSFO » Mon Jul 01, 2013 8:40 am

gordo wrote:
Here's what I've got so far:

Our investment strategy is based on simple ideas like managing risk through simple asset allocation and utilizing low cost index funds that avoid high taxes, trading fees, high fund expense ratios, advisor fees, sales loads, high turnover rates, fund style drift and management changes. It is a strategy that has been proven out by over 40 years of academic research and advocated by Warren Buffet and John Bogle. It has consistently beaten well over 90% of all investors over meaningfully long investing horizons (>20 years) on a risk-adjusted basis.
Interesting facts about our portfolio:
1. Due to new funds invested as well as recent market performance, our retirement portfolio has more than quadrupled between 2009 and 2013 (July) with no meaningful change in funds, asset allocation or overall philosophy. (That is amazingly true).
2. I can tell you our retirement portfolio return (IRR) for last year (2012) to within one one hundredth of a percent: 13.99% net of all fees and taxes, without relying on an advisor.
3. At any time, I can tell you our current asset allocation between international and domestic equities versus fixed investments with a quick glance at an Excel spreadsheet as well as the future allocation plans for each year until we retire.
4. Our retirement plan includes tangible and realistic savings goals during our accumulation years and assumes a conservative 3% withdrawal rate during retirement.
5. I spend only a couple hours a year measuring and rebalancing our portfolio as necessary, which is about all the management our portfolio needs.
6. It may seem ironic, but we do not own a single share of the S&P 500 index, often held up as the quintessential stock index for comparison to actively managed mutual funds.


I would leave off the interesting facts. I doubt they are going to be that interesting to him, perhaps share the 10 or so BH philosophy points: http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy? Or something more tailored to FIL's comments.
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Re: Quick points in defense of indexing for retirement?

Postby livesoft » Mon Jul 01, 2013 8:47 am

The bet I wrote about is still the best way. Indeed, if you are not confident enough about it, why are you index investing in the first place?

But you win either way: If his portfolio does better,when he dies, you get all his money. If your portfolio does better, then you have enough money to support him in his old age. If you do poorly, he can't bother you since he gets all your money in the end anyways. Plus since he will be winning, he will not want you to change.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Quick points in defense of indexing for retirement?

Postby ML 59 » Mon Jul 01, 2013 9:09 am

Dick D wrote:You do not need to defend your position...


That first sentence sums it up.

Don't allow yourself to get boxed into feeling the need to defend or inform. Supplying him with books and reading material will just prolong the discussion; he will in turn supply you with books and reading material to support his position...and so on.

I finally had to get rather blunt with a persistent BIL on several similar issues. Hopefully that day will never come for you.
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Re: Quick points in defense of indexing for retirement?

Postby ourbrooks » Mon Jul 01, 2013 9:11 am

First, I'd gently hint that he was being an old fool by paying for advice you could get for free from books.

The first book I'd start him out with if he's into individual stocks is Malkiel's "A Random Walk Down Wall Street." It's an entertaining read and, if nothing else, may get him to start thinking about the basis on which he picks stocks and the basis active funds use to pick stocks.

Then I might send him the articles Oblivious Investor suggested, along with links to web sites such as the one Oblivious Investor runs.
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Re: Quick points in defense of indexing for retirement?

Postby Epsilon Delta » Mon Jul 01, 2013 9:31 am

It depends on whether you find the argument interesting or not.

My response starts at "Thank you for your advice" goes to "Mind your own business" and goes down from there.
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Re: Quick points in defense of indexing for retirement?

Postby Raybo » Mon Jul 01, 2013 10:44 am

Here is the example I've been using.

Suppose you have two car dealers who buy the car for the same amount. Dealer A makes a higher profit than dealer B. Where would you expect to get the better deal?

Expenses charged by investment advisers are their "profits." Higher profits for advisers is less profit for me.

Note that your FIL doesn't seem to be concerned about expenses. He believes his investment guy can pick winners. It might not be possible to convince him otherwise.
No matter how long the hill, if you keep pedaling you'll eventually get up to the top.
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Re: Quick points in defense of indexing for retirement?

Postby linguini » Mon Jul 01, 2013 11:21 am

ML 59 wrote:
Dick D wrote:You do not need to defend your position...


That first sentence sums it up.

Don't allow yourself to get boxed into feeling the need to defend or inform. Supplying him with books and reading material will just prolong the discussion; he will in turn supply you with books and reading material to support his position...and so on.

I finally had to get rather blunt with a persistent BIL on several similar issues. Hopefully that day will never come for you.


This exactly. Neither of you is going to "win" this argument because you're both already convinced you're right. You're not going to convince him you're right and he's wrong. So, how you handle this should depend entirely on whether or not you want to spend the rest of your life debating with your wife's dad about whether or not it's a good idea to invest in silicon valley IPOs and obscure ETFs. If that's not your idea of a fun time, close down this discussion now, or it will become impossible later. Whenever he brings up the topic, say, "We're glad you've found an advisor you trust, but my wife and I have found an investing strategy that works for us, and we have no plans on changing. So, what did you think of the Sixers' draft day trade?" If you are firm and keep on making obvious redirecting comments to unrelated topics whenever he brings it up, he'll probably take the hint and stop bothering you. If he doesn't take the hint, firmly insist that it's not open for discussion and continue changing the subject. Instruct your wife to do the same. Nip this in the bud.
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Re: Quick points in defense of indexing for retirement?

Postby pkcrafter » Mon Jul 01, 2013 11:33 am

Dick D wrote:You do not need to defend your position.
I would just tell him that you appreciate his interest and concern in your financial future. You realize his desire to help you and his daughter is a demonstration of his love. We have our own financial plan and intend to follow it. Avoid argumentation and discussion of your decision as you will not change his mind. Thanks but no thanks. Better yet have his daughter tell him.

If he brings it up in the future just repeat your statement.


+1

You can add your investment philosophy if you want, but it probably will make no impression at all--except he may get the idea that you do have a strategy. Make it clear that you are not interested in an active approach to investing and don't discuss it again.


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Re: Quick points in defense of indexing for retirement?

Postby Sidney » Mon Jul 01, 2013 11:38 am

If you have children, you tell the M-I-L that if F-I-L doesn't shut up, SHE will never see her grandchildren again.
I always wanted to be a procrastinator.
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Re: Quick points in defense of indexing for retirement?

Postby Garco » Mon Jul 01, 2013 11:52 am

It's a little tricky convincing somebody to adopt your approach (or stop hawking his approach) by referring to the PRR. For one thing most people just aren't aware of their PRR, as opposed to the aggregate percentage change in the value of their portfolio. For another thing, that PRR depends a whole lot on your asset allocation, how much risk is in your portfolio, and how lucky or unlucky you were in a given period. Getting a PRR of 13% with 80% equities rather than, say, 50% equities, may say more about your AA than the performance of your various investments. Finally, you want to be able to talk about the need for balance in your AA and minimizing the downside risk in mediocre or bad markets.

So I would favor, in addition to gently telling the guy to "STFU dear F-I-L, we're doing fine and don't want higher costs or higher risk," focus on your long-term accumulation-building goal and the low costs in your time and worry in getting there.
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Re: Quick points in defense of indexing for retirement?

Postby Higman » Mon Jul 01, 2013 12:21 pm

You might tell him about Warren Buffett's million dollar bet: S&P 500 Index fund vs. pool of 5 hedge funds over a 10 year period. Warren is now winning.

http://finance.fortune.cnn.com/2013/01/ ... -fund-bet/
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Re: Quick points in defense of indexing for retirement?

Postby kate1234 » Mon Jul 01, 2013 1:57 pm

I thought of this article by Rick Ferri: http://www.rickferri.com/blog/investmen ... me-people/
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Re: Quick points in defense of indexing for retirement?

Postby entyrii » Mon Jul 01, 2013 2:32 pm

ML 59 wrote:
Dick D wrote:You do not need to defend your position...


That first sentence sums it up.

Don't allow yourself to get boxed into feeling the need to defend or inform. Supplying him with books and reading material will just prolong the discussion; he will in turn supply you with books and reading material to support his position...and so on.

I finally had to get rather blunt with a persistent BIL on several similar issues. Hopefully that day will never come for you.


To be honest, I think this is probably the best advice. I would be very brief and clear about your investment philosophy: "We believe in a diversified, passively-managed, buy-and-hold strategy with ultra-low fees and costs. I appreciate your willingness to help, but we aren't interested in active management, stock picking, or advisers and their fees."

The question you have to ask is: do you want him to butt out, or do you want to have a spirited discussion? I think this is similar to political or religious chats with family or friends too... some can enjoy a debate, but others just don't want the fuss. If you want a debate, then arm yourself with research, books, articles, and talking points. The other question you have to ask yourself is: if you hand him a reading list of articles or a stack of books to read, are you prepared to read all the silly Jim Cramer-type nonsense he would offer you as a rebuttal? If you want to bypass the fuss, then be very clear, firm, and polite in summarizing what your strategy is, and insist that you are sticking to it. Thanks but no thanks with a smile. (His concern does come from a loving, fatherly place you know.)
"The more they overthink the plumbing, the easier it is to stop up the drain." | -Montgomery Scott
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Re: Quick points in defense of indexing for retirement?

Postby gks » Mon Jul 01, 2013 2:43 pm

When your Father-in law starts, you could just say, "That's interesting." Or, That's really interesting."

http://www.jokes-news.com/2007/02/24/charm-school/

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Re: Quick points in defense of indexing for retirement?

Postby livesoft » Mon Jul 01, 2013 5:13 pm

entyrii wrote:The question you have to ask is: do you want him to butt out, or do you want to have a spirited discussion?

I love the spirited discussions and have no problem holding my own. If someone tells me what they are invested in, I will always bring it up after it tanks: "So you bought both gold and Apple last year? Really?"

I have a long-time friend who doesn't do index fund investing. We see each other for a few weeks every year and always check up in vague ways about our portfolios. I don't know how much he has and he doesn't know how big our pile is either, but we always talk retirement, vacations, etc so we can guess. He will never change me to market timing and I thought I would never change him to index, but ....

I got a recent phone call and he was asking me which books I would recommend for index fund investing and asset allocation.

Anyways, if my FIL was doing this to me, I would make the bet that I described without hesitation. That would lead to spirited discussions which I would find to be enormously fun.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Quick points in defense of indexing for retirement?

Postby InvestorNewb » Mon Jul 01, 2013 5:31 pm

gordo wrote:6. It may seem ironic, but we do not own a single share of the S&P 500 index, often held up as the quintessential stock index for comparison to actively managed mutual funds.


What holding do you use as the core of your portfolio?
Current Holdings: VTI, VXUS, VNQ, VCE (largest to smallest)
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Re: Quick points in defense of indexing for retirement?

Postby gordo » Tue Jul 02, 2013 1:55 am

Well looks like the consensus is just to keep my mouth shut and deflect. Probably the safest bet anyway. We'll see how it goes when we next meet...
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Re: Quick points in defense of indexing for retirement?

Postby gordo » Tue Jul 02, 2013 1:56 am

InvestorNewb wrote:What holding do you use as the core of your portfolio?


Generally TSM variants.
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Re: Quick points in defense of indexing for retirement?

Postby plannerman » Tue Jul 02, 2013 9:57 am

I think you are wasting your time. Either you get low-cost investing or you don't. There is nothing you can say to convince you FIW what he has done his whole life isn't the way to go. Just non and go on with your life.

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Re: Quick points in defense of indexing for retirement?

Postby Ged » Tue Jul 02, 2013 10:15 am

It doesn't sound like he respects you very much. I'd just say some canned phrase like "The studies show passive investing beats actively managed investing 85% of the time" and leave it at that.
Lack of planning on your part does not constitute an emergency on my part.
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