What evidence would prove the Boglehead mentality wrong?

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BSA44
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What evidence would prove the Boglehead mentality wrong?

Post by BSA44 » Tue Sep 16, 2014 10:57 am

I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?

Note: I am interested in this from more of a theoretical rather than practical perspective (hence the post in Investing Theory). I become concerned when I buy into a mentality so strongly that I have trouble coming up with ways that I could be convinced otherwise (see http://en.wikipedia.org/wiki/Confirmation_bias). For example, I would likely dismiss another truly effective strategy based on the fact that it could be attributed to chance.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by toto238 » Tue Sep 16, 2014 10:58 am

The basic laws of mathematics would have to be proven incorrect?

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Call_Me_Op » Tue Sep 16, 2014 10:59 am

toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
+1

It's not a mentality - it's mathematical fact. Consider millions of talented people, all trading with one another. The average trader will have average performance MINUS his trading costs - by definition. If you hire an average-performing (talented) trader, he will deliver average performance MINUS the fees he charges MINUS his trading costs.

if you think you have a greater chance of picking an above-average trader than the next guy, the data says you are wrong.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by technovelist » Tue Sep 16, 2014 10:59 am

Hyperinflation, or a long period of high inflation and poor stock returns, e.g., the 1970's continued for many more years.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by toto238 » Tue Sep 16, 2014 11:02 am

toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
There is a non-zero possibility of this occurring though. It's not that 1+1 would cease to equal 2. But that we may discover that the mathematical construct of "1 + 1" simply doesn't reflect anything in reality as nothing is exactly 1. 1 is a myth that we created based off of our limited understanding of how the world works.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Call_Me_Op » Tue Sep 16, 2014 11:06 am

toto238 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
There is a non-zero possibility of this occurring though. It's not that 1+1 would cease to equal 2. But that we may discover that the mathematical construct of "1 + 1" simply doesn't reflect anything in reality as nothing is exactly 1. 1 is a myth that we created based off of our limited understanding of how the world works.
I liked your original statement better.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by baw703916 » Tue Sep 16, 2014 11:07 am

toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
Is the assumption that exponential economic growth can continue forever valid? Especially if population stops growing exponentially? I'm not saying the assumption might not be valid, but I'm not 100% convinced we can just assume that to be the case.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Call_Me_Op » Tue Sep 16, 2014 11:08 am

baw703916 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
Is the assumption that exponential economic growth can continue forever valid? Especially if population stops growing exponentially? I'm not saying the assumption might not be valid, but I'm not 100% convinced we can just assume that to be the case.
This argument is non sequitur. What do exponents have to do with it?
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Re: What evidence would prove the Boglehead mentality wrong?

Post by toto238 » Tue Sep 16, 2014 11:09 am

baw703916 wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
Is the assumption that exponential economic growth can continue forever valid? Especially if population stops growing exponentially? I'm not saying the assumption might not be valid, but I'm not 100% convinced we can just assume that to be the case.
Whether or not it's the case wouldn't change what Bogleheads would do. Regardless of whether companies can increase profits or not, as long as companies are making profits, it makes sense to own a total stock market index fund.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Call_Me_Op » Tue Sep 16, 2014 11:13 am

Note: All of my comments above are related to indexing versus active management of equities. I understand that the original question is broader than this.

As far as a mix of stocks and bonds being "optimal", I'm not sure we can make that statement even today.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by toto238 » Tue Sep 16, 2014 11:22 am

Well here are the Boglehead main principles, and I'll break down what would prove each one wrong:

Live Below Your Means

If there was actionable evidence that the world as we know it would come to a screeching halt in the very near future (e.g. massive asteroid will smash into Earth next week wiping out all life), then this is no longer valid. On a more realistic note, if you are given a diagnosis by the doctor of less than a year to live, this rule goes out the window as well.

Asset Allocation (Holding Bonds) Is Essential

In order for this not to be true, the very nature of how stocks and bonds work would have to change. For instance, if the federal government mandated that all bonds be convertible bonds, the very nature of bonds that make them different from stocks would be eroded.

Buy Low Cost Funds that are Widely Diversified

If someone invents that drug from Limitless and you're the only person participating in the market that has access to it, this rule goes out the window. Otherwise, if you're a normal human being without superpowers, this rule stands.

Tax Efficiency Matters

So if the federal government is overthrown and replaced by a Libertarian-esque zero-tax society, then tax efficiency would no longer matter. But as long as taxes exist, tax efficiency matters.

Stay the Course

If the next market crash to occur is so big that literally the entire world economy collapses and never recovers, then this rule goes out the window. But remember, we recovered from the crash of 1929, we recovered from the crash of 1987, and we recovered from the crash of 2008. And a lot of other crashes in the meantime. The market always recovers.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt » Tue Sep 16, 2014 11:24 am

Passive investing would be suboptimal if you could demonstrate an implementable alternate strategy that provides superior returns after all costs (including trading, taxes, market impact, and any management fees). You will also need to show that the strategy could not be be implemented inside a passive vehicle (ETF or index fund). Finally, you'll need to provide a convincing reason why this strategy would continue to work even after it is known. In other words, you have to show why someone would take the other side of this trade.

Meeting all of these requirements is a very difficult task. For example, many argue that value investing of one sort or another meets the first and last criteria. But it doesn't meet the second since you can use existing index funds to include it. There is also good evidence that professionals who do fundamental investing (e.g. Graham or Buffett-style reviews of individual companies' financials, management, industry outlooks, etc) outperform non-professionals, but only before expenses. The amount they charge for their work is greater than the outperformance they provide.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by baw703916 » Tue Sep 16, 2014 11:24 am

The concept of a rate of return makes no sense without exponential growth. It's not meaningful to discuss one investment style vs. another except in terms of the expected return, which implicitly assumes continued economic growth.

It depends on what you mean by "the Boglehead mentality". Do you mean merely that it's better to invest in low cost index funds than more expensive active funds? I'm not arguing that. But there's a more fundamental assumption underlying that: that by saving a certain percentage of earnings when you are young, investing in a certain way (low cost index funds, diversification, etc.), the magic of exponential growth will allow you to have a comfortable retirement, without actually having to save the same number of dollars as you will spend in retirement.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Sbashore » Tue Sep 16, 2014 11:36 am

Alex Frakt wrote:Passive investing would be suboptimal if you could demonstrate an implementable alternate strategy that provides superior returns after all costs (including trading, taxes, market impact, and any management fees). You will also need to show that the strategy could not be be implemented inside a passive vehicle (ETF or index fund). Finally, you'll need to provide a convincing reason why this strategy would continue to work even after it is known. In other words, you have to show why someone would take the other side of this trade.

Meeting all of these requirements is a very difficult task. For example, many argue that value investing of one sort or another meets the first and last criteria. But it doesn't meet the second since you can use existing index funds to include it. There is also good evidence that professionals who do fundamental investing (e.g. Graham or Buffett-style reviews of individual companies' financials, management, industry outlooks, etc) outperform non-professionals, but only before expenses. The amount they charge for their work is greater than the outperformance they provide.
You would also have to demonstrate that the strategy is optimal in the future. Neat trick.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by Alex Frakt » Tue Sep 16, 2014 11:40 am

Sbashore wrote:
Alex Frakt wrote:Passive investing would be suboptimal if you could demonstrate an implementable alternate strategy that provides superior returns after all costs (including trading, taxes, market impact, and any management fees). You will also need to show that the strategy could not be be implemented inside a passive vehicle (ETF or index fund). Finally, you'll need to provide a convincing reason why this strategy would continue to work even after it is known. In other words, you have to show why someone would take the other side of this trade.
You would also have to demonstrate that the strategy is optimal in the future. Neat trick.
I try to get around that with my third requirement.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Fallible » Tue Sep 16, 2014 11:44 am

The "Boglehead mentality" is, ultimately, common sense. What common sense is based on can change, but never the common sense about it. :happy
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Re: What evidence would prove the Boglehead mentality wrong?

Post by BSA44 » Tue Sep 16, 2014 11:52 am

baw703916 wrote:It depends on what you mean by "the Boglehead mentality". Do you mean merely that it's better to invest in low cost index funds than more expensive active funds? I'm not arguing that. But there's a more fundamental assumption underlying that: that by saving a certain percentage of earnings when you are young, investing in a certain way (low cost index funds, diversification, etc.), the magic of exponential growth will allow you to have a comfortable retirement, without actually having to save the same number of dollars as you will spend in retirement.
I think the idea of using low cost/tax efficient funds are unassailable. I'd be more curious about the other aspects of the Boglehead mentality (e.g., "stay the course"). For example, is it possible that the stock market could eventually stop going up (e.g., the population stagnates and productivity gains through technology/other means are inconsequential). Another example could be that broad index funds may become suboptimal because part of the market becomes inefficient due to forced government regulations (e.g., freezing the selling of already owned stock in banks, but allowing the bank to release new shares at a set price). Again, these are all hypothetical, but at minimum it seems to be a good thought exercise to examine under which factors should one stop staying the course; and more importantly what would be the clear signals that one should move away from the current Boglehead mentality.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Lysander » Tue Sep 16, 2014 12:11 pm

If everyone invested using index funds, then at some point the makeup of those funds would calcify and become unmoored from value.

An index fund is actively traded by its managers, but these trades are executed at a very slow rate using simple algorithms based on public rather than proprietary knowledge. Critically, the trading algorithm is simple enough and transparent enough that it is accepted as an index. For example, if company Terra Nova, Inc. were to zoom from obscurity to become the largest company in the US, then it would have to be incorporated into the S&P 500. The employees at S&P have to determine when Terra Nova, Inc. gets included in the S&P 500 and who gets bumped off the list. Skynet does not do this. In addition, there are armies of accountants producing and verifying quarterly financial statements every quarter which are analyzed by the index curators.

The effect of this exertion is that the index keeps tabs on its members.

If everyone took their surplus and invested it in index funds steadily using dollar-cost averaging, then the performance of the companies in the index would not be overseen as actively. The incentive for those armies of accountants and fund managers to do due diligence would diminish. Money would continue to flow to companies in the index even if they became more unprofitable, simply because they are already in the index. Profitable companies outside the index would struggle to attract funding. This would be a huge economic distortion.

Index funds rely on the price discovery performed by active traders. If no one actively traded and if everyone stopped doing research and due diligence, the index would zombify. At that point active investing would outperform index investing.

Active investors and passive investors are symbiotic. If the pendulum swings too far in one direction, it makes sense to switch sides.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by MathWizard » Tue Sep 16, 2014 12:12 pm

The philosophy assumes that
1) there is a publicly traded market
2) there is a long-term return for capital when looking at the entire publicly market
3) the market is regulated so that all of the return cannot be diverted to a small group of people
4) that the capital markets are accessible by the average person.

Why:
1) Goes away if we move away from capitalistic society. I don't see that happening in my lifetime, but I never thought
I'd see the Berlin Wall or the Iron Curtain fall either. (By capitalistic I mean that you get some kind of return relinquishing
control of your assets. So no interest on loans ...)
2) This is essentially the same as 1.
3) This covers the case where there is a return, but only for a small group of people. Things that are illegal now, and
some that became illegal after the SEC was formed.
4) If all, or the vast majority of companies are owned by private equity, then the average person would not be able to
"own the whole market" so maybe the gains only go to private companies. Essentially you'd have an economic oligarchy,
think back to kings, lords and serfs. I this we are moving away from that over the long-term as a world, though there may
be times and regions where the movement may not move evenly forward.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by WhyNotUs » Tue Sep 16, 2014 12:39 pm

A scenario in which indexes became an overwhelming majority of the market and thus there was no stock price "punishment" for poorly performing companies.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by DaufuskieNate » Tue Sep 16, 2014 12:48 pm

Not that this is officially a "Boglehead mentality" but there does seem to be a lot of home country bias lurking about among Bogleheads in general. It could be a mistake to "stay the course" on a strong home country bias in a world where one's home country enters an economic permafrost. Think Japan. Think staying invested in home countries with low growth and aging demographics while long-term global economic growth and innovation is driven from some other corner of the world.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by YttriumNitrate » Tue Sep 16, 2014 1:01 pm

A giant meteor heading towards the earth would generally prove the Boglehead mentality wrong.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by ausmatt » Tue Sep 16, 2014 1:03 pm

Lack of volatility (no alpha). A couple of posts touch on this - without volatility low cost index funds would likely lose their allure.

Although lack of alpha would Aldo mean people are not trading equities, so this scenario would mean something else major is going on.

I always like to hear my friends that are day trading or trading based on statistics ... They are helping keep that alpha going that fuels an index investor's returns.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by RadAudit » Tue Sep 16, 2014 1:05 pm

baw703916 wrote: But there's a more fundamental assumption underlying that: that by saving a certain percentage of earnings when you are young, investing in a certain way (low cost index funds, diversification, etc.), the magic of exponential growth will allow you to have a comfortable retirement, without actually having to save the same number of dollars as you will spend in retirement.
I don't recall ever being promised that outcome. Now, I may have convinced myself of that concept. I may have even bet my and my wife's retirement, and the kids' inheritances on that concept. However, I don't recall that specific outcome was ever promised. As SWR have drifted down over time - from 4% to 3% to - the particular number for projected exponential growth has apparently declined. So, may be that calculation has to be redone using a new exponential growth projection.

I'm not even sure it was promised that if you put X away for Y years, you'd have XY at the end of the duration - with or without exponential growth. Now, there may have been a lot of chatter about - well, if things continue on in the future pretty much as in the past, then you can expect thus and so to happen. And, your eyes may have glazed over as you reached for your slide rule or finance tables as you went to calculating and the " ... as in the past." may have slipped by unnoticed.

I guess you might be able to say folks with a Boglehead mentality may be making a number of assumptions that may not work out as planned but that isn't the same as being fundamentally wrong. LBYM still works.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Tue Sep 16, 2014 3:39 pm

A large majority of active managers outperforming the index, after fees, would be pretty decisive, but I don't much expect to see that. On the other hand, I already know I'm wrong, in the sense that I'm not 100.00000% correct, and that my portfolio is not optimal. Fortunately I'm content to be satisfied with "probably good enough", and I don't need to claim a certainty that will never exist.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by William4u » Tue Sep 16, 2014 4:07 pm

Call_Me_Op wrote:
toto238 wrote:The basic laws of mathematics would have to be proven incorrect?
+1

It's not a mentality - it's mathematical fact. Consider millions of talented people, all trading with one another. The average trader will have average performance MINUS his trading costs - by definition. If you hire an average-performing (talented) trader, he will deliver average performance MINUS the fees he charges MINUS his trading costs.

if you think you have a greater chance of picking an above-average trader than the next guy, the data says you are wrong.
Plus, even if you DO pick an above average trader, the trader has to be FAR ENOUGH ABOVE AVERAGE to overcome the extra trading costs and fees. Over a 20 year period, less than 10% of active mutual funds manage to do this.

If you follow those "top 10%" active funds for another 20 years, only 10% of those will outperform the index fund. So, after 40 years, only 1% of the active funds will have consistently outperformed the index. Good luck picking that needle out of the haystack!

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Aish » Tue Sep 16, 2014 4:09 pm

telemark wrote:A large majority of active managers outperforming the index, after fees, would be pretty decisive, but I don't much expect to see that. On the other hand, I already know I'm wrong, in the sense that I'm not 100.00000% correct, and that my portfolio is not optimal. Fortunately I'm content to be satisfied with "probably good enough", and I don't need to claim a certainty that will never exist.
The whole point of Boglehead investing is "getting your fair share." By definition, before costs, only 50% of the money can beat the market. Once we take into consideration index funds cost less than active funds, on average, index funds MUST outperform active funds.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by KyleAAA » Tue Sep 16, 2014 4:11 pm

It's not impossible that the Boglehead way of investing would become unwise at some point in the future. I'm having trouble thinking of a single specific test, though. Perhaps technology/market realities/tax laws/etc could someday reach to the point where frictional costs become effectively zero, negating indexing's and/or buy-and-hold's advantage?

I don't think using active mutual fund managers or hedge fund managers would work because that doesn't really capture how difficult it is to beat the market. Just because a highly-qualified mutual fund manager controlling $3 billion can't beat the market doesn't mean a highly-qualified individual can't. Using active fund manager performance as the benchmark is a red herring.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by dhodson » Tue Sep 16, 2014 4:19 pm

given the amount of evidence currently available, it is unlikely that a different method could be proven superior within our lifetimes.

For instance lets just say that I have a strategy that outperforms indexing when including costs. I would need 20 years or more of data on it and id need others to be able to repeat it.

Its just a very high hurdle at this point.

I imagine some day there will be adjustments to the boglehead mentality but at this point it will be like evolution.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by linenfort » Tue Sep 16, 2014 4:40 pm

I think a few people started to lose faith when the market crashed in '08 & '09, particularly if they were just about to enter retirement. Maybe the Boglehead mentality felt wrong, but it was temporary insanity, or at least an illusion.
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Re: What evidence would prove the Boglehead mentality wrong?

Post by texaspapas » Tue Sep 16, 2014 5:09 pm

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?
I'm really new at this, but perhaps this (?): http://www.bogleheads.org/forum/viewtop ... 10&t=23036 (a "lost decade")

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Phineas J. Whoopee » Tue Sep 16, 2014 5:12 pm

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?
...
Yours is a perfectly fair question. If there are no circumstances and no evidence which could, even in principle, challenge the idea then it isn't in the tradition of the Enlightenment.

So, let's evaluate the Boglehead mentality, as you put it in the subject line, point by point, to examine what could undermine it.
Bogleheads wrote:Develop a workable plan.
There's an underlying, unstated assumption that any plan could be workable. If, for example, world-wide food production failed to create enough calories and nutrients for the population as it is right now some of us would not make it. That's a valid criticism. It relies on our economic system, food production, and disease prevention and treatment systems to remain relatively stable.
Bogleheads wrote:Invest early and often.
This idea is based on the expectation of positive future returns. If there were a prolonged time in which nominal returns were negative it would be best to save, but not invest, until it had ended.
Bogleheads wrote:Never bear too much or too little risk.
Well, yes I suppose. Within a fairly stable system that's a tradeoff one can make. It's stated in such a way that it isn't, so far as I can see, falsifiable. It makes a good point, but I don't see any way to challenge it so your question applies especially here.
Bogleheads wrote:Diversify.
Diversification reduces the impact of several types of risks, but doesn't eliminate them, and others remain unaddressed. Bill Bernstein has written that attempting anything more than an 80% or so likelihood of portfolio success is meaningless because other risks are bigger than 20%.
Bogleheads wrote:Never try to time the market.
That's probably bad advice if one wants the most chance to get extremely wealthy and is willing to bear the risk of becoming and staying penniless instead. It relies on an investor's goals.
Bogleheads wrote:Use index funds when possible.
This is where, and you referred directly to it in your question, basic arithmetic triumphs. As in the previous item, it isn't a formula for winning big or fast, but it's a reliable method which has tended to work over time. The gross aggregate return of the market is what it is. On a gross basis the participants in aggregate get that, because there isn't anywhere else for it to go, and that's all the return there is. On a net basis the participants, in aggregate, get less because investing brings expenses. This isn't really a principle or a mindset. It's the simple observation that x > (x-1).
Bogleheads wrote:Keep costs low.
Here, again, we're talking about arithmetic, but only if spending more on investment fees and charges doesn't increase net returns. If it were true one could reliably do this, then there would be an equilibrium level of optimal costs, although it probably would shift and wouldn't share the stable characteristics of Lagrangian points. Otherwise, it's the simple observation that (x-1) > (x-2).
Bogleheads wrote:Minimize taxes.
This principle can only be a relative one, and speaks only about investing results, not personal benefits. If taxes were so low that, for example, police and fire services were unavailable, well being might be lower than if taxes were high enough to provide them. This one is definitely falsifiable on a society-wide basis.
Bogleheads wrote:Invest with simplicity.
In my view this principle follows from earlier ones, including the assailable fourth one, and is a means of achieving the assailable seventh.
Bogleheads wrote:Stay the course.
This one, in the place of honor, is based on nothing more than empirical observation.

So, to sum up, your question is a good one to think about. If nothing could dissuade us, then what are we grasping? Taken as a whole I'd say the weaknesses are they're based on a relatively stable economy, market, food production system, economic system, and political system. Two are simple arithmetic - let's not debate whether math is an inherent characteristic of the universe or a socially-constructed convention. Some are goal-dependent. The last is based on observing past results.

Thanks for prompting me to think about these things. No doubt others can add and detract, assuming any are still awake. :wink:

PJW

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Re: What evidence would prove the Boglehead mentality wrong?

Post by zaboomafoozarg » Tue Sep 16, 2014 9:08 pm

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Re: What evidence would prove the Boglehead mentality wrong?

Post by grayfox » Wed Sep 17, 2014 1:53 am

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?

Note: I am interested in this from more of a theoretical rather than practical perspective (hence the post in Investing Theory). I become concerned when I buy into a mentality so strongly that I have trouble coming up with ways that I could be convinced otherwise (see http://en.wikipedia.org/wiki/Confirmation_bias). For example, I would likely dismiss another truly effective strategy based on the fact that it could be attributed to chance.
New ideas come along an push out old ideas. This is the normal evolution of knowledge and has happened in every field, including investing.

Back in the 1930s, Graham and Dodd wrote the book Security Analysis where they presented their theory of value investing. That was the new idea. So in the 1950s and 1960s, people were picking stocks according to Graham and Dodd.

Meanwhile, in academia in the 1950s, people like Harry Markowitz and Bill Sharpe were inventing Modern Portfolio Theory (MPT) and Capital Asset Pricing Model (CAPM). These ideas stayed in academia until 1973 when Burton Malkiel wrote Random Walk Down Wall Street . But it wasn't until 1976, when John Bogle introduced a new investment product, the Vanguard S&P 500 Index fund, that individual investors could apply the new ideas from Markowitz and Sharpe.

Boglehead investing principles, and much of contemporary investment practices, are more or less based on MPT and CAPM.

So is that the ultimate investment theory? Hardly.

The theory of Life-cycle finance and consumption smoothing began in 1969 with Paul Samuelson and Robert Merton. Others, like Franco Modigliano, developed the theory over the past 30 years or so. As yet, it has not been embraced by many, probably because the right products are not available to implement it properly. But those products will eventually come along.

The Future for Retirement Funding
So, what I see in the future is flying cars, jetpacks, robot maids and life-cycle investing products.

In the future, people will not own any mutual funds or stocks and bonds in their retirement accounts. There will be no asset allocation or rebalancing to worry about. No small-cap value vs. total stock market. No 100% stocks vs. age in bonds. No glide paths, safe-withdrawal rates, lazy portfolios, should I add commodities or junk bonds or gold as a diversifier or dividend stocks. None of that stuff.

Instead, every pay period workers will automatically put savings into a fully inflation-index Deferred-Income Annuity (DIA). Their quarterly statement, instead of showing their account balance going up and down with the market, will show how much inflation-adjusted income they are entitled to collect when they turn 65 or 67 or 70.

The only thing that needs to be done is for the right products to become available. It probably involves companies like Vanguard, insurance companies, and the government also needs to get involved to back the stuff up with come kind of insurance so that it can be fully guaranteed.

This is the future.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Wed Sep 17, 2014 2:11 am

Aish wrote: The whole point of Boglehead investing is "getting your fair share." By definition, before costs, only 50% of the money can beat the market. Once we take into consideration index funds cost less than active funds, on average, index funds MUST outperform active funds.
This is a rather stronger conclusion than the underlying arithmetic justifies.

Before costs, a total market index must outperform half the money in the market (and underperform the other half), but this tells us nothing about the composition of those halves. There could be, for example, particularly stupid forms of indexing that consistently underperform the market, and we know that for specific time periods there have been index weightings that have outperformed the market, although whether that will persist in the future is unprovable. And while the performance of active managers as a group will converge on the average, nothing in that precludes individual managers from outperforming, even after fees. There are reasons to doubt anyone's ability to consistently beat the market, but to get there you have to move beyond just saying "average is average."

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Re: What evidence would prove the Boglehead mentality wrong?

Post by telemark » Wed Sep 17, 2014 2:18 am

grayfox wrote:In the future, people will not own any mutual funds or stocks and bonds in their retirement accounts. There will be no asset allocation or rebalancing to worry about. No small-cap value vs. total stock market. No 100% stocks vs. age in bonds. No glide paths, safe-withdrawal rates, lazy portfolios, should I add commodities or junk bonds or gold as a diversifier or dividend stocks. None of that stuff.

Instead, every pay period workers will automatically put savings into a fully inflation-index Deferred-Income Annuity (DIA). Their quarterly statement, instead of showing their account balance going up and down with the market, will show how much inflation-adjusted income they are entitled to collect when they turn 65 or 67 or 70.
Uh, that sounds a lot like Social Security, which we already have :happy

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Re: What evidence would prove the Boglehead mentality wrong?

Post by grayfox » Wed Sep 17, 2014 2:34 am

telemark wrote:
grayfox wrote:In the future, people will not own any mutual funds or stocks and bonds in their retirement accounts. There will be no asset allocation or rebalancing to worry about. No small-cap value vs. total stock market. No 100% stocks vs. age in bonds. No glide paths, safe-withdrawal rates, lazy portfolios, should I add commodities or junk bonds or gold as a diversifier or dividend stocks. None of that stuff.

Instead, every pay period workers will automatically put savings into a fully inflation-index Deferred-Income Annuity (DIA). Their quarterly statement, instead of showing their account balance going up and down with the market, will show how much inflation-adjusted income they are entitled to collect when they turn 65 or 67 or 70.
Uh, that sounds a lot like Social Security, which we already have :happy
Yes, it's back to the future. Social security and the old Defined-Benefit company pension are a basically inflation indexed Deferred-Income Annuities (DIAs) which solved the retirement funding problem. Our parents generation retired comfortably on pension and social security and never had to invest in the stock market and learn all the intricacies of risk and return, diversified portfolios, etc. Unfortunately, company pensions have gone away and social security benefits don't cover all the spending needs for most people.

We are finding out is that when every worker is responsible for saving and investing for their own retirement, the average person does not save nearly enough or invest it prudently. Most Americans don't even remember how to do fractions, so expecting everyone to solve the retirement funding problem on their own is a bit much for many people.

One proposal I saw was to allow people to "buy" a higher social security payment. You would give the social security administration, say, $100,000 and you would get some amount added to their monthly benefits.

Eventually, maybe soon, I expect to see a fully inflation-indexed DIA as an option in 401K plans.

Anyway, to answer the OP question, BH approach does not have to be proven wrong. There is no wrong. But something better will come along and replace it. And I don't expect that Bogleheads will abandon the BH approach. Someone once wrote that "science advances one funeral at a time." I suspect something like that here. Eventually there will be one Boglehead left standing, the Last of the Bogleheads. When his portfolio is finally liquidated, like the children's rhyme, "and then there were none."

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Re: What evidence would prove the Boglehead mentality wrong?

Post by longinvest » Wed Sep 17, 2014 7:19 am

Phineas J. Whoopee wrote:
Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?
...
Yours is a perfectly fair question. If there are no circumstances and no evidence which could, even in principle, challenge the idea then it isn't in the tradition of the Enlightenment.

So, let's evaluate the Boglehead mentality, as you put it in the subject line, point by point, to examine what could undermine it.
Bogleheads wrote:Develop a workable plan.
There's an underlying, unstated assumption that any plan could be workable. If, for example, world-wide food production failed to create enough calories and nutrients for the population as it is right now some of us would not make it. That's a valid criticism. It relies on our economic system, food production, and disease prevention and treatment systems to remain relatively stable.
Bogleheads wrote:Invest early and often.
This idea is based on the expectation of positive future returns. If there were a prolonged time in which nominal returns were negative it would be best to save, but not invest, until it had ended.
Bogleheads wrote:Never bear too much or too little risk.
Well, yes I suppose. Within a fairly stable system that's a tradeoff one can make. It's stated in such a way that it isn't, so far as I can see, falsifiable. It makes a good point, but I don't see any way to challenge it so your question applies especially here.
Bogleheads wrote:Diversify.
Diversification reduces the impact of several types of risks, but doesn't eliminate them, and others remain unaddressed. Bill Bernstein has written that attempting anything more than an 80% or so likelihood of portfolio success is meaningless because other risks are bigger than 20%.
Bogleheads wrote:Never try to time the market.
That's probably bad advice if one wants the most chance to get extremely wealthy and is willing to bear the risk of becoming and staying penniless instead. It relies on an investor's goals.
Bogleheads wrote:Use index funds when possible.
This is where, and you referred directly to it in your question, basic arithmetic triumphs. As in the previous item, it isn't a formula for winning big or fast, but it's a reliable method which has tended to work over time. The gross aggregate return of the market is what it is. On a gross basis the participants in aggregate get that, because there isn't anywhere else for it to go, and that's all the return there is. On a net basis the participants, in aggregate, get less because investing brings expenses. This isn't really a principle or a mindset. It's the simple observation that x > (x-1).
Bogleheads wrote:Keep costs low.
Here, again, we're talking about arithmetic, but only if spending more on investment fees and charges doesn't increase net returns. If it were true one could reliably do this, then there would be an equilibrium level of optimal costs, although it probably would shift and wouldn't share the stable characteristics of Lagrangian points. Otherwise, it's the simple observation that (x-1) > (x-2).
Bogleheads wrote:Minimize taxes.
This principle can only be a relative one, and speaks only about investing results, not personal benefits. If taxes were so low that, for example, police and fire services were unavailable, well being might be lower than if taxes were high enough to provide them. This one is definitely falsifiable on a society-wide basis.
Bogleheads wrote:Invest with simplicity.
In my view this principle follows from earlier ones, including the assailable fourth one, and is a means of achieving the assailable seventh.
Bogleheads wrote:Stay the course.
This one, in the place of honor, is based on nothing more than empirical observation.

So, to sum up, your question is a good one to think about. If nothing could dissuade us, then what are we grasping? Taken as a whole I'd say the weaknesses are they're based on a relatively stable economy, market, food production system, economic system, and political system. Two are simple arithmetic - let's not debate whether math is an inherent characteristic of the universe or a socially-constructed convention. Some are goal-dependent. The last is based on observing past results.

Thanks for prompting me to think about these things. No doubt others can add and detract, assuming any are still awake. :wink:

PJW
PJW,

This was a really nice analysis of our philosophy. Reading this forum, I often get the impression that members have forgotten about parts of it. It is refreshing to be reminded of our 10 principles. Thanks!
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Re: What evidence would prove the Boglehead mentality wrong?

Post by vested1 » Wed Sep 17, 2014 7:54 am

Some very thought provoking comments have been posted here. As long as there is still an ongoing basic drive toward fairness in financial regulation I think the Boglehead method of capturing the return of the overall markets will outperform asset management, therefore we must remain vigilant.

It may be that as a group, Bogleheads are more optimistic than the average investor and trust in the long term health of economies, riding the waves of sustained growth that have allowed most who stayed the course to ride over the troughs with confidence. The adverse effects of recency bias are well known, but how do you define recency? Bogleheads would probably agree that major historical events influence economies in the long term, and sometimes permanently. Hopefully we learn by our mistakes and avoid becoming top heavy by allowing an increasingly small number of individuals and corporations to dictate policy based on personal gain.

Literature, especially non-fiction is full of supposition of how our society, and therefore our opportunities to flourish can be undermined by the greed of the few, think Soylent Green. Any one of these unlikely scenarios would render the Boglehead philosophy meaningless.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Grt2bOutdoors » Wed Sep 17, 2014 8:10 am

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?

Note: I am interested in this from more of a theoretical rather than practical perspective (hence the post in Investing Theory). I become concerned when I buy into a mentality so strongly that I have trouble coming up with ways that I could be convinced otherwise (see http://en.wikipedia.org/wiki/Confirmation_bias). For example, I would likely dismiss another truly effective strategy based on the fact that it could be attributed to chance.

Fred Schwed Jr. wrote a book "Where are the Customers Yachts". When you see the customers of financial service intermediaries heading out to the moorings to take their yacht (not dinghy) out for a sail, when it is the customers who are taking the entire summer off to jet off to France or head out to their home in the Hamptons by helicopter, then you can say alternative investing methods are superior to that of the Boglehead strategy. Otherwise, you are just wasting your money on the guy in the Bimmer driving down Rte. 27 on Friday morning to get to his summer home.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: What evidence would prove the Boglehead mentality wrong?

Post by 3504PIR » Wed Sep 17, 2014 8:26 am

In the simplest form, BHism is a strategy which like all strategies works until it doesn't work. Fortunately, it isn't that simple but there is risk of failure in the following scenarios: 1) During the accumulation phase market returns do not sufficiently grow to produce a sufficient nest egg to support retirement. 2) During retirement, negative returns reduce the nest egg to the point retirement can no longer be supported.

There are a lot of assumptions here that the markets will always go up. In fact, they might - but they might not also (see Japan). There are also a lot of assumptions that if we have another 2008/2009 that things will recover quickly as they did (recency bias). In 2009 the market could have just as easily not recovered - imagine that.
Last edited by 3504PIR on Wed Sep 17, 2014 8:47 am, edited 1 time in total.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by bpp » Wed Sep 17, 2014 8:33 am

There is nothing in the "Boglehead mentality" that assumes markets always go up.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by swaption » Wed Sep 17, 2014 8:47 am

Let me ask the question differently, what evidence would convince you that someone could systematically beat the house and make money betting on horse racing or college football?

The mechanism by which betting odds and lines are established is not all that different than the mechanism that sets the prices of securities. You either think that an individual can systematically beat the crowd or you don't.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by 3504PIR » Wed Sep 17, 2014 8:57 am

bpp wrote:There is nothing in the "Boglehead mentality" that assumes markets always go up.
A few quotes from this thread:

“Regardless of whether companies can increase profits or not, as long as companies are making profits, it makes sense to own a total stock market index fund.”

“The concept of a rate of return makes no sense without exponential growth. It's not meaningful to discuss one investment style vs. another except in terms of the expected return, which implicitly assumes continued economic growth.”

“The philosophy assumes that
1) there is a publicly traded market
2) there is a long-term return for capital when looking at the entire publicly market
3) the market is regulated so that all of the return cannot be diverted to a small group of people
4) that the capital markets are accessible by the average person.”

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Bill M » Wed Sep 17, 2014 9:08 am

Getting back to OP's question,
Phineas J. Whoopee wrote:
Bogleheads wrote:Stay the course.
This one, in the place of honor, is based on nothing more than empirical observation.
This is the key piece of the "Boglehead mentality." And it is based purely on past performance predicting future results. We're constantly told that isn't so. But it has been, at least in the US.

Wade Pfau did a study of other country stock markets, and safe withdrawal rates (http://www3.grips.ac.jp/~pinc/data/10-12.pdf). Needless to say, 4% didn't hold up too well in other countries. It makes me really wonder whether "Stay the Course" suffers a similar bias. Would investors in {Italy, Japan, France, Belgium, Ireland...} have been able to retire having made steady contributions to index funds and rebalanced annually? If someone has seen such an analysis, I'd really appreciate a pointer to it.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by bpp » Wed Sep 17, 2014 9:13 am

3504PIR wrote:
bpp wrote:There is nothing in the "Boglehead mentality" that assumes markets always go up.
A few quotes from this thread:

“Regardless of whether companies can increase profits or not, as long as companies are making profits, it makes sense to own a total stock market index fund.”

“The concept of a rate of return makes no sense without exponential growth. It's not meaningful to discuss one investment style vs. another except in terms of the expected return, which implicitly assumes continued economic growth.”

“The philosophy assumes that
1) there is a publicly traded market
2) there is a long-term return for capital when looking at the entire publicly market
3) the market is regulated so that all of the return cannot be diverted to a small group of people
4) that the capital markets are accessible by the average person.”
To me, the "Boglehead mentality" says nothing more, or less, than "diversify, and keep costs down." If one does this, one will efficiently get what the markets have to offer. It says nothing about whether what the markets offer will prove to be satisfactory for one's purposes or not.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Gropes & Ray » Wed Sep 17, 2014 9:34 am

If you're investing in an S&P 500 fund, you're investing in an active portfolio. So, if you found a similarly broad active portfolio, with similar turnover and lower costs, there would be no reason not to use it. S&P 500 funds only have an advantage because you're not paying the manager who picks the stocks, you're only paying someone to execute the trades that the manager dictates. Otherwise, it's more-or-less luck which companies outperform others. Keeping costs down is the advantage of an index fund.

As far as a total market fund, an active fund might be better if it covered all categories of equities and cost less. But again, it's really cost that is the driver. Half of portfolios will beat the total market before costs, and half will not. Then some that beat the total market will fall behind once costs become a consideration. By choosing total market, you're deciding that average is just fine, especially since most funds actually are worse than average once costs are considered. But if costs weren't an issue, you would probably still be looking for a fund that was very broad, and therefore close to average, so that you minimize your risk of having a toilet fund.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Johno » Wed Sep 17, 2014 10:10 am

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history.
Depends IMO how narrow or broad one's version of the 'Boglehead mentality'. As others have noted, it's axiomatic that all investors in an index combined have a net return of the index gross return minus expenses. That can't change. And that leads almost* axiomatically to the conclusion that investors with higher expenses will have lower net returns on average than investors with lower expenses.

But when 'BH mentality' is expanded beyond that core insight, there are aspects where things could change, or it could be wrong now. An example already given is 'stay the course' if interpreted as sticking with a particular % of stocks in all cases expect if the investors' own non-market related personal situation has changed. That hasn't always been the best strategy in all stock markets in history everywhere, as opposed to say having a minimum $ amount of safe investments regardless of %. It has generally worked in the US during that country's period as dominant economy in the world. And it may continue to work in the lifetime of people investing now. But it doesn't require a change in the laws of mathematics for it not to work.

And then there are questions like international diversification where some people claim Bogle-ism supports one conclusion, and others claim it supports some opposing conclusion. Where it's not even clear how the 'BH mentality' applies to a question, then it's obvious the answer could change.

And needless to say the validity or even relevance of such a philosophy depends on the existence of a basically free capital market regulated according to the rule of law.

*'almost' because it's mathematically possible that there could be a large class of active investors with lower expenses and consistently poor gross returns, a large class of active investors with higher expenses and consistently good gross returns, and only a small class of passive investors with average gross returns and low expenses. In that case the higher expense active investors could do best...it's just not very practically likely, and this is where the 'BH mentality' relies on empirical observation (the return record of high v low expense investments for retail investors), and basic consideration of human nature rather than math (everyone would tend to pile into the high expense high gross return investments leaving not enough low cost underperforming investors to 'feed' on; arguably that tends to explain the history of hedge fund performance).

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Re: What evidence would prove the Boglehead mentality wrong?

Post by Aptenodytes » Wed Sep 17, 2014 10:18 am

We don't have to scan the entire universe of beliefs and truisms that have some affinity with Bogleheads. I think the OP is asking a genuine question about the hard core. So my response would be that these two things would prove the approach wrong:

1) Alternatives to indexing can be identified which are reliably better. E.g. it is possible to identify in the current mutual fund market the next Magellan Fund, and also to identify the right time to shift out of this next-Magellan fund into the next-next-Magellan fund.

2) Alternatives to buy-hold-rebalance can be identified with are reliably better. E.g. even if one accepts the proposition that indexing works better than picking winners, it is possible to finally discover a market-timing scheme that works reliably.

I think these are the core -- the other stuff is far less central.

People have been looking so hard, for so long, using all the available data, that it is really hard for any of us to imagine these things coming to pass; that's why the first response you got was that math would have to be proven wrong. But as a theoretical matter, which was the spirit of your question, it is possible for both things to happen. Of course, Taylor's head would probably explode too.

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Re: What evidence would prove the Boglehead mentality wrong?

Post by postingname » Wed Sep 17, 2014 10:31 am

Andrew0504 wrote:I'm 26 and hopefully should have a long time of investing ahead of me. The benefits of holding a mix of stocks and bonds index funds in a passive investing style is relatively new relative to the length of developed human history. While unlikely, it's entirely possible that at some point during my lifetime this may no longer be the optimal long-term choice (e.g., something could radically change about stocks/bonds, the world economy could transform in some fundamental way, or some new investing vehicle could come about). I buy into the set it or forget it mentality, but is there something that could occur that would signal that it is worth reconsidering the traditional Boglehead strategy?


At age 26, you would be able to ride out a long period of secular stagnation or stagflation. Or most any other long-running dismal market. Even in a two-decade down market like the Japanese market, by including bonds in one's portfolio and rebalancing, it is possible to have positive returns. So, you could probably say a Boglehead approach is okay given a long time horizon.

The real issue (to me) is more in what kind of investor you want to be. At age 26, you probably haven't had a lot of real experience in the markets and so don't know whether or not you're skilled or capable of being skilled. I think the 80/20 rule probably applies here. 80% of investors are average or lousy, but there is that 20% that beats the market and is more adaptable to changing market conditions. If you lock yourself into a Boglehead approach, you may never know if you're one of the 20%.

Locking yourself into the Boglehead approach also means that you genrally "aren't allowed" to follow the markets. That can be intellectually stifling since finance and markets are some of the most interesting things on earth. But here, you will get the advice not to read the news, and you will only be "allowed" to read it when it's packaged into a book and you can then report it in the "Books You Are Currently Reading Thread", because by that time, the news has turned into "history". ;)

As you can see, I personally am not sold on the Boglehead approach because (among other things) I think it stifles human initiative, with the mantra seemingly being "Dare to be average!" But it's hard to argue with the fact that a lot of people seemingly do resonate with this philosophy. You'll have to go outside this board to round out your knowledge and get different opinions.

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