Bogleheads

[sullivanke]

A few Thoughts that ran through my head.....What do you think the #1 obstacle is in Americans not seeing the true benefits of Index/passive investing? I am a recent member of this site and have utilized this investing strategy for a couple years now.....In all honesty, money and finances are not my thing (although I am determined to learn more) but after reading very minimal material and running some trivial numerics in the head it seems so obvious that this is the long term ticket to success. What I cant understand is why a majority of Americans cannot see this. Also, was wondering what you feel would happen if all investing Americans (or a majority) of them were to catch onto this strategy, how it would influence future returns of such investing. THANKS>
Lastly, maybe this should be another post but for those who are posting that are in their 20's (young 20's, when I was still in college) how do you manage such high numbers already in Roth IRA's? [some over 100k]

[Valuethinker]

[zhiwiller]

It's simply because we value our leisure time so much that we trust professionals with everything. Few people service their own cars - learning would take too long, I'm included here. Why learn how to fix your own computer when you can call the 'Geek Squad' in? The same goes for investments. The financial world is incredibly complicated.

So folks hire advisors that push people to the products that give them the highest commission. People will fall for performance chasing, survivorship bias, fear, lies, uncertainty, doubt. They just don't know better. I've seen this with my girlfriend. Her dad has a "buddy" that sells investments. I looked at the prospectus she brought home. 5.75% load. 2% expense ratio. Just junk. But how would she know better?

Why would anybody index when there are so many loud idiots out there that blurt out how easy it is to pick winning stocks that beat the market?

[rocketman]

[Insurance Guy]

[waitforit]

Lack of education or perhaps comprehension, bundled with the notion that we are masters of our own domain. When data from 50+ years of academic research is continually presented, I don't see how one can refute it. The problem is the average joe has

a) never heard of such research, as the academics aren't into marketing, and
b) unable to understand it even if he read it.

As a very recent convert, my excuse was that 'a rising tide lifts all boats', and by luck I've picked some very good boats. In fact, I was looking at my notes as to why I bought certain funds when I did, and lo and behold.. just another performance chaser!

[Ted Valentine]

1) People believe in paying "experts" to do a job. We have doctors, lawyers, engineers who are educated and trained and are experts on complex matters of their field. People believe financial professionals are the same.

2) People believe their investments are doing better. The reason? Prospectuses. I rarely see a prospectus that show a fund underperformed an index for all time periods. They always find a time period where they beat the index. If they don't, then they just make up their own index and beat it.

3) People are Lazy.

4) Don't want to be average but fail to realize the repercussions of not being average over a long time frame.

5) Inertia.

6) People go with what they're familiar with. There's a false comfort in familiarity.

7) Most people hate math.

8) Many don't care. As long as it goes up, they're satisfied.

9) People like to trust people. They go with someone they know or a friend knows. It makes them comfortable knowing someone is there for them.

10) I don't think anything would change for long term buy and hold investors if everyone indexed. There might be less volatility in the short term. This is a good question, but would never happen. Otherwise there wouldn't be lotteries, casinos, horse tracks, sporting events, American Idol, etc. People have a strong desire to pick the big winner.
_________________
“A bear market is an extended period of time during which people who think this time is different sell all their investments to people who understand that this time is never different.”

[JackS]

"What do you think the #1 obstacle is in Americans not seeing the true benefits of Index/passive investing?"

Pride. People naturally think they are smarter than the market. You will also see this with every sucker that walks into a casino. Some people also like the excitement of active trading (gambling). They think, what's the fun in just choosing a diversified portfolio, buying into it and holding it and only rebalancing?

[Sunny Sarkar]

[MWCA]

[Schooly D]

[mephistophles]

I actually agree with InsuranceGuy's post. I can add, that from decades of experience, most people simply are not very concerned with saving and investing. Instead, they are interested in comsumption. Consumption not only of their income, but added consumption via credit cards and other debt instruments. Many of these people's only equity is that in their homes, and they typically squander this in the name of evermore consumption.

Vanguard Diehards are a rare breed.......a very rare breed. Diehards should take pride in their interest in saving, investing, insuring and doing whatever it takes to make responsible decisions, limit consumption as needed and thereby achieve the great American Dream that is available for those who seek it.

Regards,

ole meph

[leonard]

#1 reason. It is hard to say which one is #1.

I will go with arrogance (some are nicely calling this "pride" ). People are arrogant enough to think that they can beat all the other investors (the "pride" part), despite overwhelming evidence to the contrary (thus, moving it to arrogance IMO). Despite being presented solid evidence that active management is extremely unlikely to work, they know they are the exception because they have special insight.

Second aspect to arrogance, they think they can forecast the future. Despite the fact that most would admit they cannot say for sure if it will rain tomorrow or what celebrity will die in a week or when they will get their next traffic ticket, they will claim to be able to accurately predict what the market will do tomorrow, in a month, or in a year.

Another close issue is education. There is simply not enough education in high school about personal finance. I think if more people were trained to understand the basics of personal finance concepts, it would follow that many more would see the benefits of passive/index investing. Much harder to be sold an economically inefficient vehicle (like load mutual funds, for example) to an educated consumer. Obviously, this assumes an acadmically based, unbiased curriculum - not one sponsored by Oppenheimer or Vanguard or some other fund company.
_________________
Leonard

Market Timing: Do you seriously think you can predict the future? What else do the voices tell you?

If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

[PlainJane]

One of the indexes most people are familiar with is SPY. When I started investing, around 2000, the people talking loudly about indexing were advocating just putting your money into SPY and forggeting about it. If you had done that, you would have lost about 40% of your money and if you had the courage to hang on, you would just now be breaking even. Seven years is a long time to wait.

Maybe things like that make people frightened about indexing.

[leonard]

[Live Free or Diehard]

[PlainJane]

[leonard]

[Gekko]

>What do you think the #1 obstacle is in Americans not seeing the true benefits of Index/passive investing?

they don't want to "leave any money on the table". they think they can beat the index.

[dcbonnett]

It's easy to beat the index funds:
1. Buy a newsletter to get your picks.
2. Money magazine and Forbes always have lists of good stocks and funds.
3. Buy low P/E stocks
4. Buy the stocks of companies you like.
5. Wall Street week and other well regarded TV financial programs have a lot of good leads
6. Screen for top performing funds and stocks with best YTD, 1 year, 3 and 5 and 10years returns.
7. Brokers have a lot of good inside information.
8. Analyst's reports.
9. IPO and new fund start ups.
10. The lists just goes on...if you can't beat the averages, you must be some pathetic case. d

[mptfan]

[Valuethinker]

[Chas]

[PlainJane]

MPTFAN, It really depends on when in 2000 you entered the Market. If you started investing for the first time in August of that year (Like I did), you haven't done nearly as well.

But all this is really besides the point. You have to remember that the average invester has never heard of Swedroe or Fama/French or Slice and Dice. He may know that it is important to be "diversified," but he thinks this means owning 10 well chosen stocks. He thinks this, becuase that is what Jim Cramer keeps telling him. He also knows that it is possible to pick "great" stocks if he does his "homework." He has no idea what that means, but has a vague idea that it has something to do with studying a company's financials and looking at P/E and understanding how the business fits into the overall state of the economy. Of course, at some point he crumbles under the weight of this overwhelming task, but he doesn't assume that the task is itself as impossible as reading tea leaves. He just beleives that his money would be safer with an expert who can actually do all the research that TV keeps telling him must be done. He never questions the trueism that its possible to beat the market. Why should he?

So at that point he consults a financial advisor who throws up a chart of the "market," meaning the sp-500. The guru tells him in somber tones what would have happened to him if he had put his money in at the worst time. Then the guru puts up some charts of his favorite funds and shows the investor how much safer he would have been with someone with a good track record and an excellent strategy. It seems to make sense. What other choice does he have?

I'm actually amazed that so many people have found their way to indexing. I found it completely by accident while browsing the financial section of Barnes&Noble. Not everyone gets that lucky.

[livesoft]

I think the #1 reason is fear: people are fearful that they will screw it up. It's thus easier to get a so-called 'expert' to help and that comes with baggage.

[jh]

...

[PlainJane]

I don't think it takes extreme intelligence to understand indexing. Maybe to understand some of the more obscure permutations and discussions on this board, but the basic theory is really quite simple. I'm definately no genious, but once I learned of indexing, it made complete sense to me.

The question is, how do people learn about indexing in the first place. For me, it was a lucky accident. How does the average person learn of it? Out of curiosity, how did you all find yourself here?

[NAVigator]

[mptfan]

[haban01]

I just sat through our 401K meeting yesterday. One person thought our Mutual Funds were covered by FDIC. Another person told me that they bailed from Dodge & Cox Stock Fund in the 3rd quarter and switched to Dodge & Cox International because it was doing better.

A better portfolio would be 40% DODGX, 20% DODFX, 40% TBM, and sleep well at night. Oh, Well-

One person told me in 2003, when the DOW was back to 10K they were going to get back in the market because things had been improving

Many don't even take advantage of a matching contribution
_________________
Eric Haban

"Stay the Course"
"Press on Regardless"

Wisconsin Diehards Chapter Coordinator

[baw703916]

[Peter Foley]

For a thorough explanation of the subject read "Why Smart People Make Big Money Mistakes" by Belsky and Gilovich

Some reasons
1. The marketing of financial products (related to this is the fact that many think a paid "professional's" opinion is worth more)
2. Overconfidence in our own abilities/Ego
3. Optimism

Belsky and Gilovich would also point out that many investors are bad (or lazy) at math.

[Chas]

[Les]

My observations:

1. A majority of Americans don't think it's cool to consider money too closely.

2. People don't think it's cool to discuss money with others. Probably because this sets up a possibility of envy in the relationship.

3. Indexing is waaaay down the list of issues in most people's economic life. Most have not gotten even to first base.
_________________
Les

[Les]

[Doc7]

My manager told me with a smile on his face how he loves watching his American Funds soar up, up, and up..."You just give them a 5 % fee up front"

I'm only 22 and been under his employ for 6 months, so I smiled and told him that sounded cool

[risharinga]

I also think that many people that are aware of index investing may find the concept too simplistic and may not trust it to generate the best returns for them over the long term. They expect the process of investing to be complicated.
The constant news abou the "best performing funds" over the last 3 months does not make it any simpler for them.

[PlainJane]

[ramsfan]

After talking with many friends, coworkers, etc..... I am convinced that the #1 reason is that Indexing is not what the industry is "selling"..... So, it is really not well known......

There is so much hype, and BS being sold to unsuspecting clients......

When I try to help friends, I even tell them "please don't talk with your investment salesman about what I say, he will shoot holes in it with BS like "if you want to only be average, that might make sense,etc..." I tell them "nobody is selling what I am doing".........

[unclemick]

Hormones.



heh heh heh -

[gt4715b]

I think the two major reasons are behavorial finance and lack of financial education. I think that if everyone had to take a course with the basics about how markets work, what the basic asset classes are and their characteristics, the historical returns and volatility, the different types of investment vehicles explaining expense ratio and loads, etc. it would be a lot hard to sell people the blatant ripoff 5.75% load, 2% ER funds.

But there is something about how we think that pulls us towards active investing. I'm sure we know people that are smart and understand the passive/active debate but still say, "Yeah, but..."

People get pulled into individual stocks because again they don't understand how markets work and they equate a good company that they know with being a good stock.

[TimDex]

I've puzzled over this question a good deal. I don't think there is any one cause for "bad investing behavior." The issue is multiply determined.

One person I discussed Vanguard with had no investing experience, but was a good businessperson, who kept her eye on costs and expenses. Talking for 15 seconds about the cost advantage of index funds was all it took.

Another, responsible for investing some serious money for a charity, is I think frightened to death of investing money, so runs to a stockbroker for safety. The result is a god-awful portfolio, full of high expense Class C bond funds, individual bonds and stocks, ridiculous sales charges, and the like. Any comment I make, no matter how diplomatic, is resented.

I don't know why some get the light bulb over the head and others don't. They just do, or they don't.

Tim
_________________
"All man's miseries derive from not being able to sit quietly in a room alone. " -- Pascal

[mptfan]

In most cases, the more you pay, the better the service that you receive. However, with investing, you get what you don't pay for. Most people don't understand this, and it's hard to convince people of it since it runs counter to their experience.

[diasurfer]

It's easy to dismiss active investors for behavioral reasons, and I'm sure that is usually the case. However, not all active investors are dummies. Some have arguments that are not as easy for a non-expert like me to counter. Take an example posted on a recent thread:

[nisiprius]

In the United States for the last few decades, and perhaps universally, money is very dear to our hearts. Our choices on what we do with our money is taken to define who we are as people.

A consumer culture has channelled our creative self-expression so that we think the only way we can express ourselves is by our spending choices: Coke or Pepsi, Hummer or Mini Cooper, VTSMX or [please insert hot mutual fund here, I'm so ignorant I don't know the right one to propose! Today's Janus fund...]

And we hate any suggestions that we're not spending in the very best possible way. Criticizing my investing is like criticizing my driving.

Indexing is for people who don't relate emotionally to their investments and don't like money for itself, but only for what it can do for them.

It is for somewhat badly socialized people who are not well tuned in to current fashions.

I'll bet that if you could do a survey, you'd find that Bogleheads as a group are universally vilified by their teenaged daughters for dressing in clothing that doesn't match, and for driving cars that are an embarrassment to the neighborhood.
_________________
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[nisiprius]

[JackS]

[diasurfer]

[Chas]

[openminded]

Sullivanke,

Dont be so quick to think you have found a mecca, and the ones who dont follow dont get it. Indexing certainly has merit, but is not critical to investing success.

The more critical diehard aspects, IMO, is the DIY mentality, saving, delayed gratification, and ofcourse ... LOW COSTS.

I know plenty of successful active growth and dividend investors, and market timers

Try to be more openminded, you can learn a great deal more that way.

BTW, I am not against indexing.