Lies, Damned Lies, And Index Funds

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Rick Ferri
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Lies, Damned Lies, And Index Funds

Post by Rick Ferri » Mon May 20, 2019 11:14 am

By latest on Forbes.com

Lies, Damned Lies, And Index Funds

The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Lies, Damned Lies, And Index Funds

Post by Sandtrap » Mon May 20, 2019 11:16 am

Rick Ferri wrote:
Mon May 20, 2019 11:14 am
By latest on Forbes.com

Lies, Damned Lies, And Index Funds

The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.

Rick Ferri
Thanks for the reminder.
Need them often and sometimes not so often.
Aloha
j :D
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Re: Lies, Damned Lies, And Index Funds

Post by retiringwhen » Mon May 20, 2019 11:31 am

Thanks Rick,

Good reminder. It is also a not so subtle slam on Fidelity that they would produce such an mis-leading report. Every time I hear about how great Fidelity is, I worry about anyone I might recommend there getting snagged by one of the subtle (to the investor) nudges away from low-cost, market-return solutions. BTW, I recently opened an IRA there to test the waters with the Zero funds, and so far it is very nice, but I get at least 2 emails a week with very different advice columns that I see from Vanguard. Last week one was subtly pushing Annuities.

I know in other threads folks have complaining about Vanguard nudges to ETFs, etc. At least in the Vanguard case their nudges are almost exclusively to lower cost options.

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Re: Lies, Damned Lies, And Index Funds

Post by hillman » Mon May 20, 2019 11:36 am

In the second paragraph, I believe "gambit" should be "gamut."

Thank you for all you do for this community and the personal finance community as a whole. The wealth you have helped others create and accumulate is impressive. :beer

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Re: Lies, Damned Lies, And Index Funds

Post by nedsaid » Mon May 20, 2019 11:37 am

It seems that markets are getting more efficient and not less so. Huge pools of money sloshing around in the very opaque hedge funds doing heaven knows what. Also lots of factor funds and ETFs out there, a lot of what passes for passive is actually a low turnover method of active management. So no, index funds are not a danger to markets.

If index funds start to make the markets inefficient, don't think that will ever happen, but investors could adopt an active/passive portfolio with low-cost active funds as 20% to 40% of the portfolio. Vanguard has some very good low cost, lower turnover active funds. Thing is, with all the factor chasing going on out there, hard to see the markets becoming less efficient. Plus whole indexes trade daily on the exchanges in ETF form.
A fool and his money are good for business.

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Re: Lies, Damned Lies, And Index Funds

Post by duplin county » Mon May 20, 2019 11:49 am

Thanks Rick. Jack would be proud of you.

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Re: Lies, Damned Lies, And Index Funds

Post by retiringwhen » Mon May 20, 2019 11:50 am

nedsaid wrote:
Mon May 20, 2019 11:37 am
If index funds start to make the markets inefficient, don't think that will ever happen, but investors could adopt an active/passive portfolio with low-cost active funds as 20% to 40% of the portfolio.
That was my strategy 60% Indexing + 40% active with mild 5% value tilt (PRIMECAP, Windsor, Strategic Equity and Explorer + Pimco Total Return Bond) for about 15 years in part based on some 1990s writing by Jack Bogle. I finally gave up last year in part due to fees and largely to get simplified. Doing return comparisons of the total portfolio from 2006 to 2018 (the fully range of quality data I had available on my own portfolio) showed that I was getting similar returns to the Lifestrategy Growth fund when I was targeting an 85/15 AA. In other words, it was a decent strategy but required a lot more work to keep AA balanced... I don't mind the simple solution now, it is more boring and a lot less attention to re-balancing...... If Indexing got too big, I would do it again, but only if I thought the active folks were starting to beat the indexes consistently.

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Re: Lies, Damned Lies, And Index Funds

Post by Rick Ferri » Mon May 20, 2019 11:56 am

hillman wrote:
Mon May 20, 2019 11:36 am
In the second paragraph, I believe "gambit" should be "gamut."
Thanks! Fixed

Rick
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Re: Lies, Damned Lies, And Index Funds

Post by nedsaid » Mon May 20, 2019 12:05 pm

retiringwhen wrote:
Mon May 20, 2019 11:50 am
nedsaid wrote:
Mon May 20, 2019 11:37 am
If index funds start to make the markets inefficient, don't think that will ever happen, but investors could adopt an active/passive portfolio with low-cost active funds as 20% to 40% of the portfolio.
That was my strategy 60% Indexing + 40% active with mild 5% value tilt (PRIMECAP, Windsor, Strategic Equity and Explorer + Pimco Total Return Bond) for about 15 years in part based on some 1990s writing by Jack Bogle. I finally gave up last year in part due to fees and largely to get simplified. Doing return comparisons of the total portfolio from 2006 to 2018 (the fully range of quality data I had available on my own portfolio) showed that I was getting similar returns to the Lifestrategy Growth fund when I was targeting an 85/15 AA. In other words, it was a decent strategy but required a lot more work to keep AA balanced... I don't mind the simple solution now, it is more boring and a lot less attention to re-balancing...... If Indexing got too big, I would do it again, but only if I thought the active folks were starting to beat the indexes consistently.
I think a 100% indexing strategy is A-OK. Just don't think the hedge fund sponsors will wake up one day and tell the world that Jack Bogle was right, go out of business, and return funds to their shareholders. A lot out there to keep the markets efficient. I don't think we will ever get to the point where we have to buy some active funds just to keep the markets efficient. It could happen but I have pretty big doubts.
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Re: Lies, Damned Lies, And Index Funds

Post by retiringwhen » Mon May 20, 2019 12:11 pm

nedsaid wrote:
Mon May 20, 2019 12:05 pm
retiringwhen wrote:
Mon May 20, 2019 11:50 am
nedsaid wrote:
Mon May 20, 2019 11:37 am
If index funds start to make the markets inefficient, don't think that will ever happen, but investors could adopt an active/passive portfolio with low-cost active funds as 20% to 40% of the portfolio.
That was my strategy 60% Indexing + 40% active with mild 5% value tilt (PRIMECAP, Windsor, Strategic Equity and Explorer + Pimco Total Return Bond) for about 15 years in part based on some 1990s writing by Jack Bogle. I finally gave up last year in part due to fees and largely to get simplified. Doing return comparisons of the total portfolio from 2006 to 2018 (the fully range of quality data I had available on my own portfolio) showed that I was getting similar returns to the Lifestrategy Growth fund when I was targeting an 85/15 AA. In other words, it was a decent strategy but required a lot more work to keep AA balanced... I don't mind the simple solution now, it is more boring and a lot less attention to re-balancing...... If Indexing got too big, I would do it again, but only if I thought the active folks were starting to beat the indexes consistently.
I think a 100% indexing strategy is A-OK. Just don't think the hedge fund sponsors will wake up one day and tell the world that Jack Bogle was right, go out of business, and return funds to their shareholders. A lot out there to keep the markets efficient. I don't think we will ever get to the point where we have to buy some active funds just to keep the markets efficient. It could happen but I have pretty big doubts.
I am with you, the likelihood of indexing destroying the active market participants is pretty close to zero. But, if the table did tilt, it wouldn't be too hard to provide a bit of ballast as an individual investor, thus making the balance even harder to stray too off-center. Heck, as long as someone like Renaissance Technologies is out there looking for and profiting off the small anomalies, it will still be almost impossible to tilt too far to a totally passive market.

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Re: Lies, Damned Lies, And Index Funds

Post by Rick Ferri » Mon May 20, 2019 1:35 pm

It's not about EMH, it's all about CMH - costs matter hypothesis.
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Re: Lies, Damned Lies, And Index Funds

Post by Vanguard Fan 1367 » Mon May 20, 2019 2:08 pm

I appreciate your post. Nice that Jack's ideas live on!

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Re: Lies, Damned Lies, And Index Funds

Post by alpine_boglehead » Mon May 20, 2019 2:28 pm

Thanks for posting this.

I would venture as far as hypothesizing that more indexing makes the market more efficient, because all those quasi-clueless retail investors and all the funds that just seem to be a random collection of large-cap stocks with a hefty fee tag attached likely don't contribute to market efficiency. The market is about finding the price for each asset in relation to all other assets. Those who lack good information (that's me included) will just produce noise, or in a worse case distort prices (the tech bubble comes to mind).

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Re: Lies, Damned Lies, And Index Funds

Post by Tdubs » Mon May 20, 2019 2:41 pm

Rick Ferri wrote:
Mon May 20, 2019 11:14 am
By latest on Forbes.com

Lies, Damned Lies, And Index Funds

The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.

Rick Ferri
Nice article. I seem to recall that Fidelity "study" was ripped up here on BH before the Zweig article.

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Re: Lies, Damned Lies, And Index Funds

Post by telemark » Mon May 20, 2019 3:03 pm

retiringwhen wrote:
Mon May 20, 2019 11:31 am
I know in other threads folks have complaining about Vanguard nudges to ETFs, etc. At least in the Vanguard case their nudges are almost exclusively to lower cost options.
I have accounts at both Fidelity and Vanguard. Exactly one of them is constantly pushing me to do things I have no interest in doing (for example, an email just this morning, telling me what big dreams I have). When I sign into my account on their web site, I often have to click through a popup just to get access to my account balances.

And no, it isn't Fidelity.

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Re: Lies, Damned Lies, And Index Funds

Post by SpringMan » Mon May 20, 2019 3:18 pm

telemark wrote:
Mon May 20, 2019 3:03 pm
retiringwhen wrote:
Mon May 20, 2019 11:31 am
I know in other threads folks have complaining about Vanguard nudges to ETFs, etc. At least in the Vanguard case their nudges are almost exclusively to lower cost options.
I have accounts at both Fidelity and Vanguard. Exactly one of them is constantly pushing me to do things I have no interest in doing (for example, an email just this morning, telling me what big dreams I have). When I sign into my account on their web site, I often have to click through a popup just to get access to my account balances.

And no, it isn't Fidelity.
And Vanguard's constant pushing their VPAS not only to me but my spouse. I don't think VPAS is worth it.
Best Wishes, SpringMan

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Re: Lies, Damned Lies, And Index Funds

Post by vtMaps » Mon May 20, 2019 5:23 pm

retiringwhen wrote:
Mon May 20, 2019 11:50 am
but only if I thought the active folks were starting to beat the indexes consistently.
Not possible. Active investing is a zero sum game... in order for an active fund to beat the market, another active fund must trail the market. The active funds, on average, will trail the market by their higher expense ratio.

--vtMaps
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Re: Lies, Damned Lies, And Index Funds

Post by Fallible » Mon May 20, 2019 5:36 pm

Rick Ferri wrote:
Mon May 20, 2019 11:14 am
By latest on Forbes.com

Lies, Damned Lies, And Index Funds

The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.

Rick Ferri
Good article and it's a great example of how fortunate we are to have pros on this forum who can show how and why the claims of active management against indexing fall short of the truth, often well short. I think Bogleheads sense the claims are wrong or misleading, if only because they come from active management; but we can't always know how they are misleading, e.g., how data is being misused.

The "Marxism" claim was such a stretch that it prompted many clarifying responses from not only Zweig, but from Bloomberg, Burton Malkiel, and many others. But you are right: there are so many more "lies" out there needing the truth repeated.
John Bogle on his early road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: Lies, Damned Lies, And Index Funds

Post by JohnFiscal » Mon May 20, 2019 6:01 pm

Just read the article, then came here to see if there were any posts. Great article!

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Re: Lies, Damned Lies, And Index Funds

Post by retiringwhen » Mon May 20, 2019 6:45 pm

vtMaps wrote:
Mon May 20, 2019 5:23 pm
retiringwhen wrote:
Mon May 20, 2019 11:50 am
but only if I thought the active folks were starting to beat the indexes consistently.
Not possible. Active investing is a zero sum game... in order for an active fund to beat the market, another active fund must trail the market. The active funds, on average, will trail the market by their higher expense ratio.

--vtMaps
Unless (and this is the theory nedsaid and I were discussing), somehow indexing becomes so big that it begins to have structural issues that results in fundamental mispricing of some part or all of the the market. The active managers would have the advantage of being able to identify them and exploit them (in theory at the detriment of the return of the indexers since it is a zero sum game among all participant, not just the active managers). This is the basic theory behind factors. We were just discussing that one of the reasons it is almost impossible for indexing to get that big is that even a small active contingent will arbitrage away any mispricing to keep that possibility in check.

How is the possible? If indexing/passive is at some threshold where it impacts pricing efficiency, there are surely multiple methods, but poor or unbalanced index construction could in the end tip the market to misprice one segment (e.g. SmallCap Value or Emerging Markets, etc.). Another possibility would be uneven investment among the indexes. Let's say EVERYONE just wants the S&P500 and leaves the other 20% of the market uninvested. The small caps could then be bought up by active managers for excess return vs. the indexers.

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Re: Lies, Damned Lies, And Index Funds

Post by life in slices » Mon May 20, 2019 6:54 pm


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Re: Lies, Damned Lies, And Index Funds

Post by tdmp » Mon May 20, 2019 8:16 pm

vtMaps wrote:
Mon May 20, 2019 5:23 pm
retiringwhen wrote:
Mon May 20, 2019 11:50 am
but only if I thought the active folks were starting to beat the indexes consistently.
Not possible. Active investing is a zero sum game... in order for an active fund to beat the market, another active fund must trail the market. The active funds, on average, will trail the market by their higher expense ratio.

--vtMaps
Totally agree with this. Of course, there will be some active to beat the market b/c some inefficiencies may still exist and also luck still exist. However, I think it is mathematically not possible for > 50% active funds to beat its respective index consistently.

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 12:20 am

The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concerne.

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Re: Lies, Damned Lies, And Index Funds

Post by Rick Ferri » Tue May 21, 2019 7:48 am

gmaynardkrebs wrote:
Tue May 21, 2019 12:20 am
The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concern.
You may believe the 401(k) market is creating a dangerous situation for the S&P 500 and NASDAQ 100 indices, but you won't find any factual data supporting the argument.

BTW, the NASDAQ is a market where stocks trade; the S&P 500 is an index that spans all markets. The NASDAQ 100 stocks are part of the S&P 500.
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Re: Lies, Damned Lies, And Index Funds

Post by mancich » Tue May 21, 2019 8:13 am

Great article, thank you.

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Re: Lies, Damned Lies, And Index Funds

Post by Coltrane75 » Tue May 21, 2019 8:13 am

It seems like these kinds of articles are becoming more common. Passive investing has taken a lot of money from many of these companies so they are not going down without a fight.

Maybe this is paranoid but I hope it doesn't get to the point where they lobby Congress to penalize passive investing somehow.

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Re: Lies, Damned Lies, And Index Funds

Post by retiringwhen » Tue May 21, 2019 8:19 am

Coltrane75 wrote:
Tue May 21, 2019 8:13 am
It seems like these kinds of articles are becoming more common. Passive investing has taken a lot of money from many of these companies so they are not going down without a fight.

Maybe this is paranoid but I hope it doesn't get to the point where they lobby Congress to penalize passive investing somehow.
Ironically, in a related matter, the 2017 tax reform actually penalizes the use of AUM advisors in trusts and the like since their fees are no longer deductible against portfolio income. So the last round of lobbying went the other way. I don't think the string will continue unchallenged....

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 8:40 am

Rick Ferri wrote:
Tue May 21, 2019 7:48 am
gmaynardkrebs wrote:
Tue May 21, 2019 12:20 am
The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concern.
You may believe the 401(k) market is creating a dangerous situation for the S&P 500 and NASDAQ 100 indices, but you won't find any factual data supporting the argument.
I don't find your answer convincing. While there is as yet no proof, there is surely enough factual evidence to make it a highly plausible hypothesis. If ever a system could be developed to blow bubbles it would be one in which hundreds of millions of people are advised by a huge, privately run financial industry to invest 5% or 10% of their salaries in the stock market every week/month without thinking about it. That is the system we have today. As far as factual data, one need only look at at parabolic rise of the S&P 500 since the mass adoption of this system. I think the the burden of proof is on you, as a practitioner in financial industry, to disprove the hypothesis.

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Re: Lies, Damned Lies, And Index Funds

Post by ohai » Tue May 21, 2019 9:02 am

I don't find this parabolic rise of SPX argument to be convincing at all. Stocks have risen for 100 years, interest rates have fallen from 9% to 3% over the past 20-30 years, and other forces, like corporate buybacks, have also increased. I do not see why you would single out 401k contributions as a cause of a "bubble". There isn't any historical precedent of retirement accounts causing financial instability either. Practitioners like Rick have no responsibility to disprove every poorly substantiated fringe theory.

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Re: Lies, Damned Lies, And Index Funds

Post by UpperNwGuy » Tue May 21, 2019 9:48 am

gmaynardkrebs wrote:
Tue May 21, 2019 12:20 am
The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concerne.
Are you suggesting that we should stop investing in the S&P 500 and NASDAQ companies? What’s your alternative?

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 9:50 am

ohai wrote:
Tue May 21, 2019 9:02 am
I don't find this parabolic rise of SPX argument to be convincing at all. Stocks have risen for 100 years, interest rates have fallen from 9% to 3% over the past 20-30 years, and other forces, like corporate buybacks, have also increased. I do not see why you would single out 401k contributions as a cause of a "bubble". There isn't any historical precedent of retirement accounts causing financial instability either. Practitioners like Rick have no responsibility to disprove every poorly substantiated fringe theory.
Practitioners like Ferri do have a responsibility when they start a thread called "Lies, Damned Lies, And Index Funds," which suggests that people who hold a view different than theirs are liars.

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 9:56 am

UpperNwGuy wrote:
Tue May 21, 2019 9:48 am
gmaynardkrebs wrote:
Tue May 21, 2019 12:20 am
The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concerne.
Are you suggesting that we should stop investing in the S&P 500 and NASDAQ companies? What’s your alternative?
World ex-US and TIPS.

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Re: Lies, Damned Lies, And Index Funds

Post by Tycoon » Tue May 21, 2019 9:57 am

gmaynardkrebs wrote:
Tue May 21, 2019 9:50 am
ohai wrote:
Tue May 21, 2019 9:02 am
I don't find this parabolic rise of SPX argument to be convincing at all. Stocks have risen for 100 years, interest rates have fallen from 9% to 3% over the past 20-30 years, and other forces, like corporate buybacks, have also increased. I do not see why you would single out 401k contributions as a cause of a "bubble". There isn't any historical precedent of retirement accounts causing financial instability either. Practitioners like Rick have no responsibility to disprove every poorly substantiated fringe theory.
Practitioners like Ferri do have a responsibility when they start a thread called "Lies, Damned Lies, And Index Funds," which suggests that people who hold a view different than theirs are liars.
Wow.
Emotionless, prognostication free investing. Ignoring the noise and economists since 1979. Some are predisposed to consistently lose money. Don't be a sheep.

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Re: Lies, Damned Lies, And Index Funds

Post by acegolfer » Tue May 21, 2019 10:25 am

tdmp wrote:
Mon May 20, 2019 8:16 pm
vtMaps wrote:
Mon May 20, 2019 5:23 pm
retiringwhen wrote:
Mon May 20, 2019 11:50 am
but only if I thought the active folks were starting to beat the indexes consistently.
Not possible. Active investing is a zero sum game... in order for an active fund to beat the market, another active fund must trail the market. The active funds, on average, will trail the market by their higher expense ratio.

--vtMaps
Totally agree with this. Of course, there will be some active to beat the market b/c some inefficiencies may still exist and also luck still exist. However, I think it is mathematically not possible for > 50% active funds to beat its respective index consistently.
Your intuition is correct. It's mathematically proven by Sharpe. https://web.stanford.edu/~wfsharpe/art/ ... active.htm

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Re: Lies, Damned Lies, And Index Funds

Post by vtMaps » Tue May 21, 2019 10:33 am

tdmp wrote:
Mon May 20, 2019 8:16 pm
However, I think it is mathematically not possible for > 50% active funds to beat its respective index consistently.
Actually, it is mathematically possible for more than half of active funds to beat the market. On average, active funds cannot beat the market, but it is mathematically possible for a majority of funds to beat the market a little bit, as long as the other active funds trail the market by a lot.

--vtMaps
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Re: Lies, Damned Lies, And Index Funds

Post by tdmp » Tue May 21, 2019 10:39 am

vtMaps wrote:
Tue May 21, 2019 10:33 am
tdmp wrote:
Mon May 20, 2019 8:16 pm
However, I think it is mathematically not possible for > 50% active funds to beat its respective index consistently.
Actually, it is mathematically possible for more than half of active funds to beat the market. On average, active funds cannot beat the market, but it is mathematically possible for a majority of funds to beat the market a little bit, as long as the other active funds trail the market by a lot.

--vtMaps
Ok . Yes I see what you mean. Thanks.

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 10:44 am

acegolfer wrote:
Tue May 21, 2019 10:25 am
tdmp wrote:
Mon May 20, 2019 8:16 pm
vtMaps wrote:
Mon May 20, 2019 5:23 pm
retiringwhen wrote:
Mon May 20, 2019 11:50 am
but only if I thought the active folks were starting to beat the indexes consistently.
Not possible. Active investing is a zero sum game... in order for an active fund to beat the market, another active fund must trail the market. The active funds, on average, will trail the market by their higher expense ratio.

--vtMaps
Totally agree with this. Of course, there will be some active to beat the market b/c some inefficiencies may still exist and also luck still exist. However, I think it is mathematically not possible for > 50% active funds to beat its respective index consistently.
Your intuition is correct. It's mathematically proven by Sharpe. https://web.stanford.edu/~wfsharpe/art/ ... active.htm
All this means is that investing in the entire universe of active investors would be unwise. It's not a condemnation of active investing. I've been delighted with Wellington over the years.

ohai
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Re: Lies, Damned Lies, And Index Funds

Post by ohai » Tue May 21, 2019 10:46 am

gmaynardkrebs wrote:
Tue May 21, 2019 9:50 am
ohai wrote:
Tue May 21, 2019 9:02 am
I don't find this parabolic rise of SPX argument to be convincing at all. Stocks have risen for 100 years, interest rates have fallen from 9% to 3% over the past 20-30 years, and other forces, like corporate buybacks, have also increased. I do not see why you would single out 401k contributions as a cause of a "bubble". There isn't any historical precedent of retirement accounts causing financial instability either. Practitioners like Rick have no responsibility to disprove every poorly substantiated fringe theory.
Practitioners like Ferri do have a responsibility when they start a thread called "Lies, Damned Lies, And Index Funds," which suggests that people who hold a view different than theirs are liars.
He suggested that the Fidelity article was misleading, and based on his evidence of bias in the fund selection process, he is likely correct. He did not say anything about 401k-created bubbles. That is an orthogonal issue raised randomly in this thread. Retirement investing, which can be allocated to any kind of fund, is not related to the argument of passive vs active investments.

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gmaynardkrebs
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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 10:57 am

ohai wrote:
Tue May 21, 2019 10:46 am
gmaynardkrebs wrote:
Tue May 21, 2019 9:50 am
ohai wrote:
Tue May 21, 2019 9:02 am
I don't find this parabolic rise of SPX argument to be convincing at all. Stocks have risen for 100 years, interest rates have fallen from 9% to 3% over the past 20-30 years, and other forces, like corporate buybacks, have also increased. I do not see why you would single out 401k contributions as a cause of a "bubble". There isn't any historical precedent of retirement accounts causing financial instability either. Practitioners like Rick have no responsibility to disprove every poorly substantiated fringe theory.
Practitioners like Ferri do have a responsibility when they start a thread called "Lies, Damned Lies, And Index Funds," which suggests that people who hold a view different than theirs are liars.
He suggested that the Fidelity article was misleading, and based on his evidence of bias in the fund selection process, he is likely correct. He did not say anything about 401k-created bubbles. That is an orthogonal issue raised randomly in this thread. Retirement investing, which can be allocated to any kind of fund, is not related to the argument of passive vs active investments.
The "orthogonal issue" is clearly dumped on at several points in Ferri's article.

chisey
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Re: Lies, Damned Lies, And Index Funds

Post by chisey » Tue May 21, 2019 11:10 am

gmaynardkrebs wrote:
Tue May 21, 2019 8:40 am
I don't find your answer convincing. While there is as yet no proof, there is surely enough factual evidence to make it a highly plausible hypothesis. If ever a system could be developed to blow bubbles it would be one in which hundreds of millions of people are advised by a huge, privately run financial industry to invest 5% or 10% of their salaries in the stock market every week/month without thinking about it. That is the system we have today. As far as factual data, one need only look at at parabolic rise of the S&P 500 since the mass adoption of this system. I think the the burden of proof is on you, as a practitioner in financial industry, to disprove the hypothesis.
I have looked and looked and can't find good data, but my suspicion is that systematic 401k contributions make up a very small portion of market activity. And among those contributions only maybe 25% go into domestic equity index funds.

I could see automatic investing in S&P 500 funds giving domestic stocks a very, very weak tailwind but the magnitude would be tiny in the face of overall market movement. And even that tailwind will die when retiree withdrawals and allocation risk reduction matches worker contributions, which can't be far away at this point.

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Rick Ferri
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Re: Lies, Damned Lies, And Index Funds

Post by Rick Ferri » Tue May 21, 2019 11:13 am

gmaynardkrebs wrote:
Tue May 21, 2019 8:40 am
Rick Ferri wrote:
Tue May 21, 2019 7:48 am
gmaynardkrebs wrote:
Tue May 21, 2019 12:20 am
The two most indexed markets are S&P 500 and NASDAQ. They attract a huge amount of 401k monthly inflows, and both are arguably at or near in bubble territory. Indexing is not the problem, it’s indexing in these two markets combined with literally thoughtless 401k contributions that are creating a very dangerous situation. I don’t think the Ferri article adequately quashes these concern.
You may believe the 401(k) market is creating a dangerous situation for the S&P 500 and NASDAQ 100 indices, but you won't find any factual data supporting the argument.
I don't find your answer convincing. While there is as yet no proof, there is surely enough factual evidence to make it a highly plausible hypothesis. If ever a system could be developed to blow bubbles it would be one in which hundreds of millions of people are advised by a huge, privately run financial industry to invest 5% or 10% of their salaries in the stock market every week/month without thinking about it. That is the system we have today. As far as factual data, one need only look at at parabolic rise of the S&P 500 since the mass adoption of this system. I think the the burden of proof is on you, as a practitioner in financial industry, to disprove the hypothesis.
That isn’t going to fly.

Your hypothesis - you prove it.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: Lies, Damned Lies, And Index Funds

Post by CyclingDuo » Tue May 21, 2019 11:42 am

Rick Ferri wrote:
Mon May 20, 2019 11:14 am
By latest on Forbes.com

Lies, Damned Lies, And Index Funds

The truth about index funds must be repeated over and over because lies are constantly being told. Index funds are not evil, they are not destroying the markets, and will not blow-up your portfolio. To the contrary, they have outperformed most active investment strategies and continue to save investors billions of dollars per year in fees.

Rick Ferri
Good timing with the article, Rick!

Gary Kaminsky and Josh Brown just teed off in a debate on CNBC with regard to active vs. index.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

pdavi21
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Re: Lies, Damned Lies, And Index Funds

Post by pdavi21 » Tue May 21, 2019 1:09 pm

I will only invest in Index Funds, so long as they continue to include my desired asset classes.

However, how often have we been told the story that active loses to Indexing, only to find that the author uses the best performing broad indices (i.e. S&P, or even Nasdaq), or that they only look at US Indices, or that they include active funds with prohibitive (or just high) expense ratios and do not exclude the impact of expenses?

There are very fine people on both sides, but there are liars on both sides too.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Lies, Damned Lies, And Index Funds

Post by gmaynardkrebs » Tue May 21, 2019 1:18 pm

pdavi21 wrote:
Tue May 21, 2019 1:09 pm
I will only invest in Index Funds, so long as they continue to include my desired asset classes.

However, how often have we been told the story that active loses to Indexing, only to find that the author uses the best performing broad indices (i.e. S&P, or even Nasdaq), or that they only look at US Indices, or that they include active funds with prohibitive (or just high) expense ratios and do not exclude the impact of expenses?

There are very fine people on both sides, but there are liars on both sides too.
I agree with your sentiment, but I'd prefer to say that advisors tend to "talk their book" on both sides.

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