Anti-Index Fund Arguments - Help staying the course.

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Ignorant
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Anti-Index Fund Arguments - Help staying the course.

Post by Ignorant » Thu Nov 16, 2017 3:27 am

I have read widely and the reason I am here is that I subscribe to the theory that most (if not all), cannot consistently beat the market average by actively investing.

I know that many people who spout arguments against index investing are exercising willful ignorance at their underperformance, or have vested interests (i.e. fees to make), however some of their points do make staying the course sometimes difficult.

Will the wiser Bogleheads help me dispute some of these points so that I may continue to stay the course. I will organise the points under bolded headings. The dot points are not my beliefs, it is my attempt at summarising points I have seen.

Index Funds Buy High/Sell Low
  • Detractors of index investing suggest that index funds do the opposite of a winning strategy.
  • Index funds must sell companies that leave the index, presumably when the stock price has lowered by a significant amount.
  • Conversely, index funds buy companies that are newly incorporated into an index, presumably as the stock price has risen significantly.
Index Funds Relies on Economic Expansion
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
    [OT comments removed by admin LadyGeek]
Past Performance does not Reflect Future Performance
  • This is similar to the previous point regarding economic expansion.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
These points make sense to me and do have me worried sometimes. Although I can think of counterarguments, I would like to hear from others wiser than I am to help me through this theoretical dilemma.

mhalley
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by mhalley » Thu Nov 16, 2017 6:54 pm

There have been detractors of index funds since the launch of “Bogles Folly”. I would just look at this as yet another example of financial porn.
Here are a couple of points off the top of my head:
1. The turnover of index funds is relatively low, I think total stock market is .03%. Buying one of these stocks at a high, selling at a low will have minimal impact over a sixty year investing cycle. Similar to the worst market timer ever.
2. Don’t all funds rely on expansion?
3. Same goes for active fund performance.

avalpert
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by avalpert » Thu Nov 16, 2017 7:04 pm

Ignorant wrote:
Thu Nov 16, 2017 3:27 am
I have read widely and the reason I am here is that I subscribe to the theory that most (if not all), cannot consistently beat the market average by actively investing.

I know that many people who spout arguments against index investing are exercising willful ignorance at their underperformance, or have vested interests (i.e. fees to make), however some of their points do make staying the course sometimes difficult.

Will the wiser Bogleheads help me dispute some of these points so that I may continue to stay the course. I will organise the points under bolded headings. The dot points are not my beliefs, it is my attempt at summarising points I have seen.

Index Funds Buy High/Sell Low
  • Detractors of index investing suggest that index funds do the opposite of a winning strategy.
  • Index funds must sell companies that leave the index, presumably when the stock price has lowered by a significant amount.
  • Conversely, index funds buy companies that are newly incorporated into an index, presumably as the stock price has risen significantly.
Companies leave a total market index when they cease to exist and join it at a designated period after their IPO - the premise is just wrong. Indexes that cover segments of the market will have firms come and go because they no longer fit the segment - if you don't want to invest in a segment, don't invest in those indexes and if you do want to invest a segment then the fund is doing exactly what you are looking for.
Index Funds Relies on Economic Expansion
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
    [OT comments removed by admin LadyGeek]
All investors rely on economic expansion - the only way to not be doing that is to successfully pick the firms that will outperform the broader economy, history has shown it is hard to do that consistently and may be even harder to identify who will do that consistently.
Past Performance does not Reflect Future Performance
  • This is similar to the previous point regarding economic expansion.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
This is absolutely true. There is no guarantees that the market will match the returns of history - there are no guarantees the market returns will be positive over any given time frame - that is what makes them risky assets and is why you expect a return above the risk free rate for investing in them. But again, this has nothing to do with indexing - this is equally true of actively picking securities except they are adding the uncompensated risk of stock selection. If you don't like the risks associated with stocks don't invest in them, via index or otherwise.
These points make sense to me and do have me worried sometimes. Although I can think of counterarguments, I would like to hear from others wiser than I am to help me through this theoretical dilemma.
These points are trite if used as an argument against indexing. Anyone who actually makes them in that context is either ignorant (not meant negatively they just lack understanding of the subject at a basic level) or intentionally misleading (that is meant negatively, they should be ashamed of themselves).

GibsonL6s
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by GibsonL6s » Thu Nov 16, 2017 7:36 pm

I personally believe that the market can be "beat". But, it is beat by doing something different than the market or concentrating your investments. These ways are of course also the best ways to also under-perform the market. What seems to have been proven is that not many managers can pick a diverse subset of stocks that will meaningfully beat the market over long periods of time when accounting for fees.

Charlie Munger has discussed these concepts in some of his talks on institutional investing.

http://houstontrust.com/wp-content/uplo ... nt-002.pdf

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David Jay
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by David Jay » Thu Nov 16, 2017 8:13 pm

There is a parallel thread running here: https://bogleheads.org/forum/viewtopic. ... 0&t=232375

A great observation by "Nisiprius" on that thread:

I would call attention to a standard deceptive sales technique which I've encountered too many times. Let's call it "the competition won't do X." All that the salesperson says is that the competition won't do it. It is very easy to think you've heard the salesperson say that he will do it. He hasn't said that at all. The application here is, "your index fund won't protect you by getting you out before a bear market."

This applies to several of the arguments in the original post which are true for indexing but are equally true for active investing:
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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arcticpineapplecorp.
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by arcticpineapplecorp. » Thu Nov 16, 2017 8:48 pm

if your anti-index fund proponents aren't trying to sell you alternative investments then that motive (profit off you) is off the table.

So if others are making this claim, isn't the burden of proof on them to prove they beat the market and will continue to do so into perpetuity? You could prove the past, but not the future so this is an impossibility.

That being said, even if you look at the past claims that your anti-indexers beat the market...well, that's probably because they were invested in something that looked different than the market. So perhaps they were invested in smaller stocks or value stocks or international stocks, etc. Basically, people who often make these claims aren't measuring the appropriate benchmark. So for instance, let's say your friend "beat" the market over a period of time but it was because value and small did better than the S&P500 or TSM. So what? You'd want to compare their portfolio NOT to TSM/S&P500 but to how the small cap and value indexes did and THEN see if they beat THOSE benchmarks. They likely didn't (especially after you factor in the costs/taxes they paid on their transactions, i.e., trading).

Finally, even if they did happen to beat a particular benchmark so what? What if they took more risk? Was the extra risk worth the extra return? Likely not. In other words let's say they invested in ten small cap stocks. The small cap index with vanguard has 1,418 stocks (source: https://personal.vanguard.com/us/funds/ ... =INT#tab=2) you see how they took FAR GREATER risk by owning fewer stocks? Wouldn't the return have to compensate for that greater risk? Do you think they really compensated enough to make up for the far greater risk they took? Likely not.

These are the types of arguments that people often don't consider, but they should. Instead they say, "I beat the market". That's nice.

Dr. Bisenbender found that only 4% of all stocks throughout history delivered all the returns of the market. Problem is, it's not always the same 4%. You (or your friends) feeling lucky enough to find the 4% of all stocks that are going to outperform going forward? Read below:

https://www.linkedin.com/pulse/only-4-s ... on-mariash

Finally, we all are the market. Indexers are the market. Market timers are the market. Speculators are the market. If everyone in aggregate is the market, then we all are going to roughly earn the return of the market before costs. All that's left is to factor in costs. Since active management (picking stocks, buying/selling) is more expensive than indexing (passively) by definition active investors will underperform indexers by the cost of their investments. Read below. If people can't understand that, there's no hope.

https://web.stanford.edu/~wfsharpe/art/ ... active.htm
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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grabiner
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by grabiner » Thu Nov 16, 2017 10:29 pm

Welcome to the forum!
Ignorant wrote:
Thu Nov 16, 2017 3:27 am


Will the wiser Bogleheads help me dispute some of these points so that I may continue to stay the course. I will organise the points under bolded headings. The dot points are not my beliefs, it is my attempt at summarising points I have seen.

Index Funds Buy High/Sell Low
  • Detractors of index investing suggest that index funds do the opposite of a winning strategy.
  • Index funds must sell companies that leave the index, presumably when the stock price has lowered by a significant amount.
  • Conversely, index funds buy companies that are newly incorporated into an index, presumably as the stock price has risen significantly.
Buying high and selling low is a behavioral issue, not an issue of returns. If you get out of the stock market after it declines, you miss the chance to recover. But if you sell one stock and buy another stock, you will still benefit if the market recovers; a stock which has fallen is not inherently more likely to rise in the future than any other stock.

In addition, the "buying high and selling low" description shows a common misconception, that indexing is equivalent to the S&P 500, which holds only large companies. You can index the entire US stock market, which means that you buy new companies and sell never; this is the Bogleheads' most popular method of indexing, with funds such as Vanguard/Fidelity/iShares Total Stock Market indexes.
Index Funds Relies on Economic Expansion
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
    [OT comments removed by admin LadyGeek]
Past Performance does not Reflect Future Performance
  • This is similar to the previous point regarding economic expansion.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
These are true, but they have nothing to do with indexing. In 2008, the stock indexes fell 37%. The average actively managed large-blend stock fund lost 38%. And this has to be what happens, since the stock indexes hold the same stocks as everyone else.

And any investment with the potential for large returns also has the potential for such large losses. Investors buy and sell investments based on the risk and return; an investment which won't lose much in an economic decline is desirable to hold, so it is priced at a level which gives it only a 2-3% return rather than the 8-10% that you historically get from the stock market.
Wiki David Grabiner

Ignorant
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by Ignorant » Fri Nov 17, 2017 2:54 am

I want to reiterate that I am not against indexing. I am for index investing. I continue contribute to my portfolio of index funds which I try to simulate the total global market for stocks and bonds.

I am not smart enough to refute these points when I heard them so I was hoping to become more knowledgeable.
mhalley wrote:
Thu Nov 16, 2017 6:54 pm
2. Don’t all funds rely on expansion?
I believe these active investors/anti-index people claim that they can make profits even irrespective of the wider economic outlook by picking the correct stocks.

I guess my argument to that point is that they may claim this yet may not be able to actually achieve what they claim.
avalpert wrote:
Thu Nov 16, 2017 7:04 pm
Companies leave a total market index when they cease to exist and join it at a designated period after their IPO - the premise is just wrong. Indexes that cover segments of the market will have firms come and go because they no longer fit the segment - if you don't want to invest in a segment, don't invest in those indexes and if you do want to invest a segment then the fund is doing exactly what you are looking for.
That does make me feel better because I don’t use index funds to choose sectors or follow any fancy indices. I am trying to be invested in the world.
avalpert wrote:
Thu Nov 16, 2017 7:04 pm

All investors rely on economic expansion - the only way to not be doing that is to successfully pick the firms that will outperform the broader economy, history has shown it is hard to do that consistently and may be even harder to identify who will do that consistently.
Yes I believe that is their argument that they can pick stocks that will perform regardless of the wider markets’ performance.

I agree wholeheartedly that many if anyone at all can actually prove this to be true for their investments.
avalpert wrote:
Thu Nov 16, 2017 7:04 pm

This is absolutely true. There is no guarantees that the market will match the returns of history - there are no guarantees the market returns will be positive over any given time frame - that is what makes them risky assets and is why you expect a return above the risk free rate for investing in them. But again, this has nothing to do with indexing - this is equally true of actively picking securities except they are adding the uncompensated risk of stock selection. If you don't like the risks associated with stocks don't invest in them, via index or otherwise.
As I sometimes tell my wife, we are invested in the world and we will either prosper as the world does or languish along with everyone else.

Our fate is tied to the fate of the world.
GibsonL6s wrote:
Thu Nov 16, 2017 7:36 pm
I personally believe that the market can be "beat". But, it is beat by doing something different than the market or concentrating your investments. These ways are of course also the best ways to also under-perform the market. What seems to have been proven is that not many managers can pick a diverse subset of stocks that will meaningfully beat the market over long periods of time when accounting for fees.
I agree.

From my understanding, investing in an index fund representing the market will mean that we will get average returns. That means that there are people achieving lesser and greater returns.

However, a you say it is nearly a gamble as most people are not able to consistently beat the market over time. Some people just get lucky for a period of time.
David Jay wrote:
Thu Nov 16, 2017 8:13 pm
There is a parallel thread running here: https://bogleheads.org/forum/viewtopic. ... 0&t=232375
Thanks, I will have a look at that thread.
arcticpineapplecorp. wrote:
Thu Nov 16, 2017 8:48 pm
You'd want to compare their portfolio NOT to TSM/S&P500 but to how the small cap and value indexes did and THEN see if they beat THOSE benchmarks. They likely didn't (especially after you factor in the costs/taxes they paid on their transactions, i.e., trading).
That is a very good point! I haven’t thought of it in that way before.
arcticpineapplecorp. wrote:
Thu Nov 16, 2017 8:48 pm

Finally, we all are the market. Indexers are the market. Market timers are the market. Speculators are the market. If everyone in aggregate is the market, then we all are going to roughly earn the return of the market before costs. All that's left is to factor in costs. Since active management (picking stocks, buying/selling) is more expensive than indexing (passively) by definition active investors will underperform indexers by the cost of their investments. Read below. If people can't understand that, there's no hope.

https://web.stanford.edu/~wfsharpe/art/ ... active.htm
That reminds me of a lecture I watched:
  • Most outperformers of the market cannot do this consistently.
  • Fees and transactions cost strip away any “outperformance” leading most active funds to underperform.
  • Therefore long-term buy and hold at the lowest fees possible is the best way to not underperform.
grabiner wrote:
Thu Nov 16, 2017 10:29 pm
Buying high and selling low is a behavioral issue, not an issue of returns. If you get out of the stock market after it declines, you miss the chance to recover. But if you sell one stock and buy another stock, you will still benefit if the market recovers; a stock which has fallen is not inherently more likely to rise in the future than any other stock.
That is a well explained argument which to me has completely defeated that point.
grabiner wrote:
Thu Nov 16, 2017 10:29 pm

In addition, the "buying high and selling low" description shows a common misconception, that indexing is equivalent to the S&P 500, which holds only large companies. You can index the entire US stock market, which means that you buy new companies and sell never; this is the Bogleheads' most popular method of indexing, with funds such as Vanguard/Fidelity/iShares Total Stock Market indexes.
Now I feel a bit daft. There argument does not hold any merit at all in regards to a total market index.

I also subscribe to the Boglehead method. I don’t believe I know which sector, “tilt” (e.g. value, small cap etc), country etc will do well so I don’t try to predict anything.

The index funds I use cover all global stocks and bonds.
grabiner wrote:
Thu Nov 16, 2017 10:29 pm

These are true, but they have nothing to do with indexing. In 2008, the stock indexes fell 37%. The average actively managed large-blend stock fund lost 38%. And this has to be what happens, since the stock indexes hold the same stocks as everyone else.
I guess what the active investment proponents are saying is that they are not the average active investor. They are the above average investor who will outperform even in bear markets.

I don’t believe it but this is just what I think they are trying to say


Thanks everyone! This has really helped me stay the course.

bgf
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by bgf » Fri Nov 17, 2017 9:16 am

"From my understanding, investing in an index fund representing the market will mean that we will get average returns. That means that there are people achieving lesser and greater returns."

By investing in a market cap weighted index (the most common kind of index) you are getting the weighted average return of the stocks held in that index based on their performance and size.

Over the very long term, your index return will probably come from a small number of stocks, the last paper I read stated that the entire market's long term return came from 4% of the stocks. ("Do Stocks Outperform Treasury Bills?" by Bessembinder).

How is this possible? Most stocks do quite poorly. In fact, most stocks don't even beat out Treasuries. Some stocks, however, perform magnificently well. The massive returns of these few make up for the poor returns/failures of the many.

- Median stock underperformed the Russell 3000 by 54% over its lifetime
- 2/3 of all stocks underperformed the Russell 3000 over their lifetime
- 40% of stocks had negative absolute returns over their lifetime
- Of all monthly stock returns from 1926 to 2015, only 47.7% outperform Treasury bill rate.
- Since 1926, the entire CRSP database of listed stocks has created ~$32 trillion in wealth. Of the 26,000 stocks comprising this database, only 86 account for over half of that wealth creation. The top 1,000 stocks, or 4%, account for all of the wealth creation. The other 96% of stocks collectively generated lifetime dollar returns that only matched the one month Treasury bill.

You cannot think of long term stock returns as falling along a bell curve. It will force you to make errors conceptualizing what you are actually doing by investing in an index.

By investing in an index, you are GUARANTEEING that you are invested in those few stocks that have incredible performance. Active investing is a loser's game as MOST STOCKS DO POORLY.

All I have done above is describe the behavior of stock returns, so I haven't even touched the issues with trading costs, taxes, decision making under uncertainty, etc.
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by Longdog » Fri Nov 17, 2017 9:29 am

Ignorant wrote:
Thu Nov 16, 2017 3:27 am
Index Funds Buy High/Sell Low
  • Detractors of index investing suggest that index funds do the opposite of a winning strategy.
  • Index funds must sell companies that leave the index, presumably when the stock price has lowered by a significant amount.
  • Conversely, index funds buy companies that are newly incorporated into an index, presumably as the stock price has risen significantly.
Index components don't change nearly as often as actively managed stock funds. In both cases, some stocks will be purchased or sold at sub-optimal times. This will happen more often in an active fund due to the higher volume of turnover.
Index Funds Relies on Economic Expansion
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
This is not specific to index funds. It applies to all funds.
Past Performance does not Reflect Future Performance
  • This is similar to the previous point regarding economic expansion.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
This is not specific to index funds. It applies to all funds. It is such a well-known concept that it appears in almost every disclaimer about investing!
These points make sense to me and do have me worried sometimes. Although I can think of counterarguments, I would like to hear from others wiser than I am to help me through this theoretical dilemma.
If you are worried that you are missing out, then choose actively managed funds. Indexers need people to invest in actively managed funds to make the market.
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by Jsboutin » Sat Nov 18, 2017 10:55 am

I think most serious research would point to an equal weight Index having a better risk adjusted expected return.

However, the size of index funds would make it almost impossible to equally invest the money in all companies without massively altering the market cap of the smaller components.

If I were very rich, I would absolutely not be using index funds (DIY equal weight index would be the way to go for me), but until that day comes, I'll stick to the next best thing.

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arcticpineapplecorp.
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Re: Anti-Index Fund Arguments - Help staying the course.

Post by arcticpineapplecorp. » Sat Nov 18, 2017 11:07 am

Ignorant wrote:
Fri Nov 17, 2017 2:54 am
I guess what the active investment proponents are saying is that they are not the average active investor. They are the above average investor who will outperform even in bear markets.

I don’t believe it but this is just what I think they are trying to say

Thanks everyone! This has really helped me stay the course.
yes, if you think about it the only reason anyone would actually buy individual stocks is because they think they'd beat the market. otherwise, just own it and get the return. So if they think they can beat the market they naturally think they're above average. So do all the other people out there buying individual stocks. By mathematical definition, they can't ALL be above average, now can they? If they think they're above average I would simply ask "Are they from Lake Woebegon?" It's called overconfidence. One of many cognitive errors investors (and others) make:

source: https://books.google.com/books?id=V2-he ... ge&f=false

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"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by GLState » Sat Nov 18, 2017 12:25 pm

Active investing proponents often claim that active will outperform index investing during bad times. Standard & Poors refutes that argument in their 2008 SPIVA Report ( Standard & Poors Index vs Active)

The belief that bear markets favor active management is a myth. A
majority of active funds in eight of the nine domestic equity style
boxes were outperformed by indices in the negative markets of 2008.
The bear market of 2000 to 2002 showed similar outcomes.


and

... However, one of the most enduring investment myths is the belief that active
management has a distinct advantage in bear markets due to the ability to shift rapidly
into cash or defensive securities. We dispelled this myth in 2003 using the case study of
the 2000 to 2002 bear market. The downturn of 2008 provided another case study. The
results are similar, with under performance across all nine style boxes.


http://www.spindices.com/documents/spiv ... d-2008.pdf

Here's CalPERSs arguments for going passive.
https://www.marketwatch.com/story/pensi ... 2013-10-03

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by snarlyjack » Sat Nov 18, 2017 3:56 pm

(half time from Saturday afternoon football).

My super duper 401K mutual fund from American Funds.
ER (expense Ratio) is 1.07%.

My Vanguard Total Stock Market Fund, ER is 0.04%.

Which fund do you think is doing better?

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by bottlecap » Sat Nov 18, 2017 4:36 pm

Despite all those “points” indexing still beats active management after fees.

So why are they still convincing to you?

JT

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by heyyou » Sat Nov 18, 2017 7:34 pm

In the long run, we all get about average performance minus our investing expenses. Our market exposure time is from when we start saving until portfolio exhaustion. The low cost advantage of index funds compounds over that long period, as do the higher costs of actively managed funds.

There are investors who out-performed the market for numerous years, but when they did fail, the failure was so bad that all of their above average gains were completely lost. These days the high performing stock pickers start hedge funds so they can charge even higher fees, but they do not out-perform over long periods. Fidelity funds are known for heavily advertising whatever did well recently, and they own such a broad spectrum of funds, that there always are a few good ones, but you will not profit long term from chasing high performance by purchasing their last year's winners.

Here, we are using Winston Churchill's advice but applied to index investing: Democracy is a terrible way to govern a country, it is only better than every other way that has ever been tried.

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by RRAAYY3 » Sat Nov 18, 2017 7:39 pm

Don’t be greedy if you want to be “comfortable” diversify with 2 index funds that allow you to “own” 10,000 companies then when you’re older add some bond / CDs to preserve what you’ve made and go on with life

I’m convinced the anti index folks are mostly put off by how boring it is - which I find to be its appeal

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by bengal22 » Sat Nov 18, 2017 7:42 pm

Ignorant wrote:
Thu Nov 16, 2017 3:27 am
I have read widely and the reason I am here is that I subscribe to the theory that most (if not all), cannot consistently beat the market average by actively investing.

I know that many people who spout arguments against index investing are exercising willful ignorance at their underperformance, or have vested interests (i.e. fees to make), however some of their points do make staying the course sometimes difficult.

Will the wiser Bogleheads help me dispute some of these points so that I may continue to stay the course. I will organise the points under bolded headings. The dot points are not my beliefs, it is my attempt at summarising points I have seen.

Index Funds Buy High/Sell Low
  • Detractors of index investing suggest that index funds do the opposite of a winning strategy.
  • Index funds must sell companies that leave the index, presumably when the stock price has lowered by a significant amount.
  • Conversely, index funds buy companies that are newly incorporated into an index, presumably as the stock price has risen significantly.
Index Funds Relies on Economic Expansion
  • Index funds' profits reflect the stock market, which in turn reflects the performance of the economy.
    [OT comments removed by admin LadyGeek]
Past Performance does not Reflect Future Performance
  • This is similar to the previous point regarding economic expansion.
  • While they accept that the market has returned 8-10% annually in the past, it cannot be guaranteed that the market will continue to do so going forward.
These points make sense to me and do have me worried sometimes. Although I can think of counterarguments, I would like to hear from others wiser than I am to help me through this theoretical dilemma.

The main reason for owning index funds is that they are cheaper to own; they have a lower expense ratio than an active fund. Since one can not easily out perform the market, the deciding factor is cost to own.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

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Re: Anti-Index Fund Arguments - Help staying the course.

Post by Ignorant » Sun Nov 19, 2017 12:44 am

bgf wrote:
Fri Nov 17, 2017 9:16 am


Over the very long term, your index return will probably come from a small number of stocks, the last paper I read stated that the entire market's long term return came from 4% of the stocks. ("Do Stocks Outperform Treasury Bills?" by Bessembinder)....By investing in an index, you are GUARANTEEING that you are invested in those few stocks that have incredible performance. Active investing is a loser's game as MOST STOCKS DO POORLY.
That's the most eye opening thing I have ever read about stock market performance and index investing. Most of the time I am just reading the same things that I already know but your post has been a true lightbulb moment.

To everyone else, I apologise if I have communicated poorly. I feel people are misinterpreting what I am saying. From everything I have read, including Boglehead philosophy, I believe that investing in index funds is the best way. I currently invest in the most agnostic manner that I know, using index funds that represent global stock and bond markets.

The genesis of this thread was because I came across a frugal/early retirement blog that was anti-index in its investment philosophy. The author made some points which my gut feeling felt was wrong from everything I knew however, I could not use my own logic to dispel the author's points.

It did not change my investment philosophy but I would be lying if I said it did not slightly shake my belief. You have all been an immense help in helping reaffirm my beliefs. The best result from this thread is I learned something new from bgf.

bgf
Posts: 437
Joined: Fri Nov 10, 2017 9:35 am

Re: Anti-Index Fund Arguments - Help staying the course.

Post by bgf » Sun Nov 19, 2017 8:00 am

Ignorant wrote:
Sun Nov 19, 2017 12:44 am
bgf wrote:
Fri Nov 17, 2017 9:16 am


Over the very long term, your index return will probably come from a small number of stocks, the last paper I read stated that the entire market's long term return came from 4% of the stocks. ("Do Stocks Outperform Treasury Bills?" by Bessembinder)....By investing in an index, you are GUARANTEEING that you are invested in those few stocks that have incredible performance. Active investing is a loser's game as MOST STOCKS DO POORLY.
That's the most eye opening thing I have ever read about stock market performance and index investing. Most of the time I am just reading the same things that I already know but your post has been a true lightbulb moment.

It did not change my investment philosophy but I would be lying if I said it did not slightly shake my belief. You have all been an immense help in helping reaffirm my beliefs. The best result from this thread is I learned something new from bgf.
I am glad I could help! That paper had the same exact effect on me when I read it earlier this year, and I am surprised that it does not get cited more often.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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