One Bogleheads idea I have a hard time understanding...

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cone774413
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One Bogleheads idea I have a hard time understanding...

Post by cone774413 »

The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
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Re: One Bogleheads idea I have a hard time understanding...

Post by Nowizard »

My belief is that all complex topics that involve uncertainty lead to a variety of theories and approaches that range from rational to irrational in efforts to make sense of what frequently does not. The Boglehead approach is one of the rational ones but saying it is incontrovertible would be dogma. It may be a solid approach, and some may be absolutists, but it is very likely that most (?) would state there is even disagreement about what factors "make" an incontrovertible Boglehead. My wife and I use most of the principles because they make sense after doing the best analysis we can with a complex topic, not all of the principles, and love this site for the wonderful people and information. Hopefully, it is not required that all tenants mentioned in the Wiki must be adhered to at all times. :happy

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Re: One Bogleheads idea I have a hard time understanding...

Post by JBTX »

A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
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Re: One Bogleheads idea I have a hard time understanding...

Post by wetgear »

Another dogma around here is "nobody knows nothing". We are aware we don't have crystal balls but historically market returns have been good and peoples attempts to beat the market usually (eventually) fail. Accepting our own ignorance we hope that owning the haystack, reducing fees and staying the course will provide what it always has before: Reliably good (but not always the best) returns. Chasing the best performance is seen as a fools errand because per the dogma above and historical data it usually has been. Being a Boglhead is not so much about picking the optimal strategy as it's about not picking a bad one.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Watty »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past.
There is a wiki the Boglehead philosophy and you may be mistaken about that, especially part about investing being predictable.

https://www.bogleheads.org/wiki/Boglehe ... philosophy

There are also at least occasional comments speculating that there could be a Japanese style stagnation.

Even if a bad market though a good case can be made than a diversified set of broad index funds will do better(or maybe less bad would be more appropriate) than things like average actively managed index fund. (Though with hundreds of actively managed mutual funds some will do better than index funds.)
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cone774413
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Re: One Bogleheads idea I have a hard time understanding...

Post by cone774413 »

JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
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Re: One Bogleheads idea I have a hard time understanding...

Post by MrMars »

I accept the boglehead investment philosophy as the simplest, most likely course to yield the desired results. I recognize my limited knowledge and realize that I can not create an investment strategy that is capable of factoring in all of the very things you mentioned and is likely to produce the desired outcome.
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Re: One Bogleheads idea I have a hard time understanding...

Post by H-Town »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
The thing is that we can't be sure. That's why risk and reward go hand-in-hand. The more sure of return from an asset class, the lesser return you should expect from it. Think of cash, saving accounts, bonds, total market index fund, sector stocks, single stock, etc. The higher degree of uncertainty, you should expect to get compensate for the risk you're taking.
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Re: One Bogleheads idea I have a hard time understanding...

Post by JBTX »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
Because an index fund owns all the stocks. The price is set by all active traders. So by definition the index will follow performance of all invested active traders. Now most active traders have fees to deal with, and some index funds have near zero fees. Thus indexing wins.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Taylor Larimore »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
cone774413:

Perhaps this short statement by Nobel Laureate William Sharpe will answer your question:

The Arithmetic of Active Management

Here's more:

What Experts Say About Indexing

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Never think you know more than the market. Nobody does." -- "In my view, owning the market and holding it forever is the ultimate strategy for winners."
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: One Bogleheads idea I have a hard time understanding...

Post by JBTX »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
This video may help. Until I saw buffet say this I really didn't fully understand why passive by definition, on average, beats active.

https://youtu.be/bzGrQUQCqCY
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Re: One Bogleheads idea I have a hard time understanding...

Post by Gaston »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past.
I’ve been a Boglehead for three decades now, but I haven’t heard the “MUST be true” mantra. The long-term historical data suggests, however, that the Boglehead philosophy HAS beaten about 80% of all other investment philosophies on a before-tax basis, and by an even higher percentage on an after-tax basis. So we think it LIKELY that it also is a good forward-looking philosophy.

You don’t have to take my word on this. You don’t even have to trust studies from Vanguard, who has a vested interest in the philosophy. But studies from Morningstar, S&P, and various independent academic authors have all come to the same conclusion.

As you note, broad diversification is important to us, but one can get that in a high-cost, actively managed fund as well. It’s really more about the emphasis on low cost (low annual expense ratios, no loads, low fund turnover, etc).

And yes, we tend to believe that no one can reliably time the market, other than by a lucky guess now and then. And we believe (from various studies) that one tends to lose more by being out of the market at the wrong time, than by what one gains by being out of the market at the right time. So again, yes, we tend to avoid market timing, and to mitigate the behavioral urges to jump from investment to investment.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Doctor Rhythm »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
It's based on the idea of a zero sum game. Some actively invested dollars in a given period will beat the market. Other invested dollars will lag behind the market. The average of all these returns is "the market". So, active investors on average will achieve "market" results assuming there are no additional expenses. Which of course there are, so active funds generally lag behind low cost index funds. Analogy = the average win-loss record of a sportsball league that plays 100 games is 50:50. It has to be. Active funds say "sacrifice one game with us, and you'll more than make up for it later in the season."

That's the theoretical framework.
Here's the empirical evidence: https://www.spglobal.com/spdji/en/spiva/#/reports
ETA: also, if you have the time, read through Vanguard's research on index investing: https://personal.vanguard.com/pdf/ISGIDX.pdf
Last edited by Doctor Rhythm on Sat Jun 05, 2021 6:25 pm, edited 1 time in total.
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Re: One Bogleheads idea I have a hard time understanding...

Post by luckyducky99 »

What do you think the "Bogleheads philosophy" is? What would you consider to be viable alternatives? These are kind of rhetorical questions, but not really. You should try to answer them for yourself.

Here's what I think the "Bogleheads philosophy" is: If you diversify and don't try to time the market and keep costs low, you will get better results on average than people who make concentrated bets and/or try to time the market and/or pay higher expenses.

There are good theoretical reasons why diversification is good. They are a little complicated, but smart people have done a lot to prove them. Google for "uncompensated risk" if you're curious.

There is very, very strong empirical evidence that timing the market is exceptionally hard to do reliably. There's probably some theory here too, information theory, etc. Again, lots of smart people have shown this.

As for costs, if the above points are in fact true and you stick to them with low costs (you can, it's easy), the arithmetic is simple.

Investing this way does not mean that you're necessarily going to get rich, or even make money. But it is the easiest and least risky way, with the best odds of coming out ahead. Yes, we could all be under water 30 years from now, but so will people who do other things (on average) and they're more likely to be further underwater.

edit:
cone774413 wrote: Sat Jun 05, 2021 4:50 pm There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago.
Note that everything I said above is agnostic to all the variables and changes you're referencing here. The market does its best to figure those out for you. What hasn't changed is the basic process by which capital is allocated.
Last edited by luckyducky99 on Sat Jun 05, 2021 5:44 pm, edited 2 times in total.
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Re: One Bogleheads idea I have a hard time understanding...

Post by chassis »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
Think of the stock market as probabilistic and not deterministic.

Bogle ideas are only one way to skin a cat. Not the best way, not the only way. It’s the chosen way for some people.
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Re: One Bogleheads idea I have a hard time understanding...

Post by selters »

Stocks should have a higher expected return than risk free bonds. If you can get 1% with no risk, then the stock market should at least give you more than 1% per year. Otherwise, a rational investor would not want to invest in stocks.
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Re: One Bogleheads idea I have a hard time understanding...

Post by HyperCat »

You're right to think it's laughable to draw any concrete conclusions about market behavior or the future from the extremely limited data available (when viewed in a purely statistical context). However, as others have said, I think you need to ask yourself what alternative to the Boglehead methodology you would rather use and why. Bet it all on TSLA? Put it all in cash under the mattress? In many ways the methods discussed here are just a nice, comfortable middle ground that makes logical sense to many.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Dottie57 »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
1. I don’t believe active fund managers can consistently produce results that beat the S&P. I’ve had active funds - some were ok, some tanked so badly the were closed. I’ve done very well with passive.

2. Expenses matter. Front loads on a fund are particularly heinous. Yes I have bought front loaded funds. Never Again.

3. Try portfoliovisualizer.cøm, choose Backtest portfolio. Try some different funds and compare to VOO (SP500). Use different time periods. 1 year , 5 years, 10 years, 30 years. It is amazing to see the results. This program is an extremely useful tool.
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Re: One Bogleheads idea I have a hard time understanding...

Post by beyou »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?

The key is the CERTAINTY of low fees and lower taxation (due to lower turnover) give a huge advantage to index funds. Yes other variables are unpredictable but these are predictable and easily quantified. It’s like asking how can you be sure an olympic track competitor will lose just because he is wearing a 20lb vest and army boots. I would not bet on such runner, would you ?
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Re: One Bogleheads idea I have a hard time understanding...

Post by Stinky »

luckyducky99 wrote: Sat Jun 05, 2021 5:33 pm Here's what I think the "Bogleheads philosophy" is: If you diversify and don't try to time the market and keep costs low, you will get better results on average than people who make concentrated bets and/or try to time the market and/or pay higher expenses.
This is a very nice one-sentence summary.

Well said!
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Re: One Bogleheads idea I have a hard time understanding...

Post by Normchad »

Stinky wrote: Sat Jun 05, 2021 7:27 pm
luckyducky99 wrote: Sat Jun 05, 2021 5:33 pm Here's what I think the "Bogleheads philosophy" is: If you diversify and don't try to time the market and keep costs low, you will get better results on average than people who make concentrated bets and/or try to time the market and/or pay higher expenses.
This is a very nice one-sentence summary.

Well said!
And, if you just earn the equity market average every year, you will leave most investors in the dust. IE, the average investor gets much less than the market average, due largely to investor behavior. https://www.thebalance.com/why-average- ... ns-2388519

This is one case where being perfectly average is the surest way to win the game.
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Re: One Bogleheads idea I have a hard time understanding...

Post by ososnilknarf »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
This is a mathematical certainty. Read Bogle`s "Little Book of Common Sense Investing". In that book he lays it out very clearly. It isn't opinion it is mathematically true.
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Re: One Bogleheads idea I have a hard time understanding...

Post by roth evangelist »

If you don't index, you need to figure out a process for selecting good fund managers. That's really difficult to do over long periods. So indexing become the default. Indexing is far more likely to give you acceptable returns than picking the right actively managed fund.
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Re: One Bogleheads idea I have a hard time understanding...

Post by MathWizard »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
To make this even easier think of the active investors who pay 1% in fees on their holdings as the control group, and the people who have the same holdings but pay 0.05% in fees as the test group.

If they have the same holdings, they have exactly the same return before fees.

The difference between what control group and the test group is the precisely the difference in the fees,or 0.95%

Why are the holdings the same? Because that is exactly what an index does,it just tracks what the active investors are doing as a whole.

Does every active investor do the same as the the test group? No. They are all trying to beat the average, and paying a lot in expenses in the hopes that they will .
They have a spread of returns, some better than average , some worse, but the weighted average is exactly what the index investor gets, and for fearless in fees.

There is no Lake Woebegone in investing, where everybody's returns are above average .

This is not to say that you can't lose money when index investing, but if you are going to invest, low cost index investing is going to give you the market average much cheaper.

Why can you expect that the market will have a positive return in the long term?
Because millions of people are working hard every day to make their company money. Their jobs depend on that. If the companies make money, you get a share of that,because you are a shareholder. You get it through dividends,or through the value of the company growing because it retained earning to improve the future earning potential of the company. Those that fail to do this, fail, and are no longer part of the market , and done other business takes their place.
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Re: One Bogleheads idea I have a hard time understanding...

Post by terran »

I guess for me it's just common sense. Do I believe I can consistently pick companies that will outperform other companies when there are tons of very smart people who spend all day doing it and have access to information I don't have? No. Do I believe I can pick a fund manager who can consistently pick companies that will outperform other companies? No. Do I believe I can pick an investment advisor who can pick fund managers who can consistently pick companies that will outperform other companies? No. If I can't pick pick companies or professionals who can pick companies or professionals who can pick professionals who can pick companies that will outperform other companies then the best I can hope for is to get the average return of the market by buying all companies, and if I'm going to do that then I may as well do so with minimal effort and minimal cost by buying index funds.
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Re: One Bogleheads idea I have a hard time understanding...

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I forget the exact qoute, but it was something like "index investing may not be the best approach, but it's better than an infinite number of worse approaches."
Last edited by SnowBog on Sat Jun 05, 2021 11:53 pm, edited 2 times in total.
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Re: One Bogleheads idea I have a hard time understanding...

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cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
It works because the alternative is picking winners or losers, or thinking you can. Now, if we were to believe the Negative Nancies and Debbie Downers around here, the permabears, then I would tend toward your line of thinking. Either Bogleheads are right or wrong. Right now my money is on right. All we have to examine is history, and history tells is the markets move up over long periods of time. If they didn't then we wouldn't invest. I know I wouldn't invest to lose money on a consistent basis.

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Re: One Bogleheads idea I have a hard time understanding...

Post by Stinky »

SnowBog wrote: Sat Jun 05, 2021 10:44 pm I forget the exact qoute, but it was something like "index investing may not be the best approach, but it's better than an infinite number of worse approaches."
This is probably a take-off on Winston Churchill's statement that "democracy is the worst form of government, except for all those others that have been tried".
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Re: One Bogleheads idea I have a hard time understanding...

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cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past.
I'm not sure what dogma you are referring to. There is no such thing as "the Boglehead philosophy," you have to be more specific.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Adenovir »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
Because human nature remains the same and it's human nature that controls the day to day movement of the stock market. Long term, economic factors will determine the movement of the market and the Bogleheads philosophy will capture whatever gains (or losses) that provides in the most efficient and reliable manner.
"Investing is simple, but not easy" - Warren Buffett
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Re: One Bogleheads idea I have a hard time understanding...

Post by oldcomputerguy »

SnowBog wrote: Sat Jun 05, 2021 10:44 pm I forget the exact qoute, but it was something like "index investing may not be the best approach, but it's better than an infinite number of worse approaches."
From Mr. Bogle's book "The Little Book of Common Sense Investing", Anniversary Edition, Chapter 20:
To repeat, while such an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite.
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Re: One Bogleheads idea I have a hard time understanding...

Post by radR investing »

terran wrote: Sat Jun 05, 2021 9:10 pm I guess for me it's just common sense. Do I believe I can consistently pick companies that will outperform other companies when there are tons of very smart people who spend all day doing it and have access to information I don't have? No. Do I believe I can pick a fund manager who can consistently pick companies that will outperform other companies? No. Do I believe I can pick an investment advisor who can pick fund managers who can consistently pick companies that will outperform other companies? No. If I can't pick pick companies or professionals who can pick companies or professionals who can pick professionals who can pick companies that will outperform other companies then the best I can hope for is to get the average return of the market by buying all companies, and if I'm going to do that then I may as well do so with minimal effort and minimal cost by buying index funds.
This is an excellent post that captures the essence of the Boglehead philosophy. Although I personally don't invest in passive index funds, I do strongly endorse the major tenets of the philosophy:

[1] invest 15-20% annually during your earning years
[2] buy-and-hold through all the market gyrations (don't try to time the market)
[3] low fees

I would be interested in hearing thoughts on what percentage of the success is attributed to these three tenets - I believe it may be 90%-plus.

Where I travel a different path is regarding risk and diversification. While there are many types of risk, the one I am most concerned with is the risk of losing money if I have to sell in a downturn (see tenet #2 - don't sell during a downturn, don't put all your money into the 'market' to where you are forced to sell during a downturn). Diversification is basically spreading the risk of loss across more stocks/sectors/asset classes so you won't expose too large a portion of your portfolio to potential loss. A huge portion of losses comes from two areas: (1) investor behavior (panic selling, market timing) and (2) general market corrections (the biggest chunk of risk is market risk, and this cannot be diversified away by adding more stocks to your portfolio, but it can be minimized by spreading across various asset classes).

My preferred methodology for investing is a variation of Direct Indexing. If you are interested in the details, there is a good blog that can be found on the front page of the website www.investblaze.com. When I consider that 56% of the returns of the S&P500 over the last two years came from a handful of companies, then I want those companies. I have a hard time believing I am diversifying by investing in the bottom 50% of the companies who barely contribute any returns. It's pretty simple to identify the top companies in each sector and analyze their revenue, earnings, and free cash flow - if these are all growing, then I am interested. And, investing this way has zero fees, so it 'checks box #3.'
Last edited by radR investing on Sun Jun 06, 2021 1:03 pm, edited 2 times in total.
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Re: One Bogleheads idea I have a hard time understanding...

Post by galawdawg »

First, understand that investing is not the same as a medical trial. You don't have a test group and a control group and account for all of the variables. You just can't because investing (at least by Boglehead standards) is designed to be a long-term endeavor (often fifty years or more), the decisions made by investors are unique to each investor (and depend upon many personal and unique factors), and the investing is done with actual funds belonging to the actual investor.

Attempting to do a controlled trial just won't work. The trial would take many decades to have measurable results because the idea is to start early in one's working years and the results aren't completely determined until the investor's death and even thereafter considering legacy giving. You can't have a control group and a test group because the money invested is sourced from the investor, any gains or losses are borne by that investor, and thus the investor has "skin in the game" which informs their decision-making. Giving each group a sum of "play money" and controlling certain decisions about the investment of that "play money" would not yield any reliable results as would not replicate actual decision-making behavior.

So the best we can do is made common sense decisions based upon the best available evidence. Take broad-based index funds, for example. One can invest in those, which have low fees, diverse holdings and provide average results. No better than the market, no worse than the market. Or one can invest in single stocks or actively managed funds hoping that their results will be above-average in the long-term (which is the only way such a strategy would be superior to the Bogleheads approach). And realize that when an investor makes the decision about which one(s) of thousands of stocks or active-funds to invest in, they are having to predict how that stock or fund will do compared to the market as a whole. And they have to predict correctly enough times with enough overperformance to overcome all of their incorrect predictions and resulting underperformance.

Diversification is another. Let's say that you have $100k to invest for thirty years with one of two choices. You can invest it all in a single-stock that you choose today in the hopes that such stock, in thirty years time, will have "above average" returns OR you can invest it all in a well-diversified index fund where you are guaranteed that in thirty years time you will have reaped average returns. What do you do? How many of the hundreds of thousands of stocks out there today will outperform a total index fund at the end of thirty years? How many of them will drop in value or become worthless? And can you, today, pick one that will outperform the total index fund when measured in thirty years time? Or, if you aren't happy with that pick, you can keep trying. But in the meantime, your $100k isn't growing as much as the index-fund investor. And understand, this isn't play money. What you receive at the end is what you will have to live on from the time you stop working until the day you leave this earth. Does that make a difference?

Consider it in a medical context. You have an urgent, life-threatening malady that requires treatment. The physician says "I have a medication that will guarantee you a good, average lifespan with good, average health. You can have it for the asking. Or, you can choose from any of those 640,000 pill bottles on the shelf." (There are nearly 640,000 stocks and actively managed funds in the world). "Now, some of those pills may result in excellent health for 100 years, others will result in extremely poor health and misery for 100 years. Some will kill you tomorrow, others will give you ten great years of life and then you'll expire. We don't have any idea which of those 640,000 will have which outcomes."

Which do you choose?

There aren't many guarantees in life, but by investing in low-cost well-diversified index funds and holding them for the long-term, an average investor is guaranteed to achieve average market returns. For most investors, that is an excellent outcome.
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Re: One Bogleheads idea I have a hard time understanding...

Post by deltaneutral83 »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
Sure, so what's your alternative if you think investing in American/Intl companies has a multi decade meltdown? Your post is more along the lines of "this time it's different" and it may certainly be, but what's your alternative strategy?

An index beats active managers because it's a zero sum game and managers charge at least $1 collectively for their services. Hence, the index beats the active side. And it crushes it over time as 1-2% a year is crippling as well as the taxes in a taxable. In sports betting, you have to win 52.5% of your bets to make any money because of the standard 10% juice to place your bet. Pros (i.e. the top 0.2% of betters) who eat, sleep, and breath sports betting (i.e. those that can spot inefficiencies through hours of research) are 57-58% and make the 5% spread on the money they risk. No one else has a chance over time.
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Re: One Bogleheads idea I have a hard time understanding...

Post by SnowBog »

radR investing wrote: Sun Jun 06, 2021 6:59 am
terran wrote: Sat Jun 05, 2021 9:10 pm I guess for me it's just common sense. Do I believe I can consistently pick companies that will outperform other companies when there are tons of very smart people who spend all day doing it and have access to information I don't have? No. Do I believe I can pick a fund manager who can consistently pick companies that will outperform other companies? No. Do I believe I can pick an investment advisor who can pick fund managers who can consistently pick companies that will outperform other companies? No. If I can't pick pick companies or professionals who can pick companies or professionals who can pick professionals who can pick companies that will outperform other companies then the best I can hope for is to get the average return of the market by buying all companies, and if I'm going to do that then I may as well do so with minimal effort and minimal cost by buying index funds.
This is an excellent post that captures the essence of the Boglehead philosophy. Although I personally don't invest in passive index funds, I do strongly endorse the major tenets of the philosophy:

[1] invest 15-20% annually during your earning years
[2] buy-and-hold through all the market gyrations (don't try to time the market)
[3] low fees

I would be interested in hearing thoughts on what percentage of the success is attributed to these three tenets - I believe it may be 90%-plus.

Where I travel a different path is regarding risk and diversification. While there are many types of risk, the one I am most concerned with is the risk of losing money if I have to sell in a downturn (see tenet #2 - don't sell during a downturn, don't put all your money into the 'market' to where you are forced to sell during a downturn). Diversification is basically spreading the risk of loss across more stocks/sectors/asset classes so you won't expose too large a portion of your portfolio to potential loss. A huge portion of losses comes from two areas: (1) investor behavior (panic selling, market timing) and (2) general market corrections (the biggest chunk of risk is market risk, and this cannot be diversified away by adding more stocks to your portfolio, but it can be minimized by spreading across various asset classes).

My preferred methodology for investing is a variation of Direct Indexing. If you are interested in the details, there is a good blog that can be found on the front page of the website investblaze.com. When I consider that 56% of the returns of the S&P500 over the last two years came from a handful of companies, then I want those companies. I have a hard time believing I am diversifying by investing in the bottom 50% of the companies who barely contribute any returns. It's pretty simple to identify the top companies in each sector and analyze their revenue, earnings, and free cash flow - if these are all growing, then I am interested. And, investing this way has zero fees, so it 'checks box #3.'
I'd be curious for how long you've been doing this as well as your results over that time.

I sat through a sales pitch from Personal Capitol trying to get me to go this way. Even if I ignored their fees, my concerns with the approach were:
  • This requires "someone" to pick the stocks, and there's a proven track record of "stock pickers" underperforming the market (although some of that is due to fees - which is you are doing this yourself you may avoid)
  • I've seen too many GE, Enron, Kodak, etc. happen, where by most accounts they were very good, very "safe" investments - until they weren't.
  • If you look at the top names in the S&P 500, it has changed wildly over time. This has seen shifts in major industries as well as some of the newest companies didn't exist 10+ years ago. So many of the future top performers may not be household names yet.
So I ultimately decided that "buying the haystack" was safer then trying to "find the needles in the haystack".

But I'm curious for what you think I missed...
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Re: One Bogleheads idea I have a hard time understanding...

Post by dbr »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past.
I don't think truth value is a property of a philosophy.

The essence of Boglehead philosophy could probably be stated as what are some wise things to do when dealing with a highly variable and unpredictable venture.

I think people would be happy to debate the possibility that various pieces of the philosophy are not wise somehow.
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Re: One Bogleheads idea I have a hard time understanding...

Post by TrivialCrisis »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
The not-so-secret embarrassment of economic forecasting (and therefore financial performance forecasting) is that it pretends to use scientific rigour where scientific rigour is impossible to achieve. You are fortunate to not be an economist if you are a fan of the scientific method.

That being said, there are still conclusions you can logically arrive at without being able to conduct controlled scientific trials. These conclusions have been laid out by others above (owning the market is a higher-certainty strategy than “picking winners”). But these conclusions should be viewed more in the context of “it is a bad strategy to invade Russia in the winter” than “we are confident the Higgs Boson exists”. One is an observation that has generally proved to be true historically. The other is the result of reams of data and rigorous statistical analysis.

The Bogelhead philosophy is historically the safest route to financial success. But it is not science.
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Re: One Bogleheads idea I have a hard time understanding...

Post by acegolfer »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
Here's the mathematical proof written by Nobel laureate. (only requires arithmetics)
https://web.stanford.edu/~wfsharpe/art/ ... active.htm
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Re: One Bogleheads idea I have a hard time understanding...

Post by Tingting1013 »

One thing that the standard Boglehead admonition to hold only passive funds misses is that there are a lot of active mutual funds, most of which have terrible track records net of fees and can be dismissed out of hand by anyone with a familiarity with benchmarking. For example just take a look at what is available in my 401k

https://www.alightfinancialsolutions.co ... ndList.pdf

Who is going to invest in a random active large cap fund in this list that is charging 1% ER? Will that active fund underperform VOO? You bet.

But that’s not what sophisticated active fund investors do. It’s a total straw man. In fact it’s been proven that active managers with strong track records tend to sustain their outperformance:

https://www.wsj.com/articles/the-mornin ... 1508946687

Image

The average outperforming fund (with five stars) still outperforms the average underperforming fund (with one star) ten years later.
Last edited by Tingting1013 on Sun Jun 06, 2021 2:27 pm, edited 1 time in total.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Johnathon Livingston »

cone774413 wrote: Sat Jun 05, 2021 4:50 pm The accepted dogma around here is that the Boglehead philosophy (broad index funds, diversification, time in market, etc.) MUST be true as historically this has led to predictable and positive outcomes in the past. I participate in clinical trials in my job, the typical idea is if an outcome is reproducible when accounting for all the possible confounding variables, you can feel with a certain degree of certainty there is causation or a predictable outcome. I don't understand how that can be the case with regards to the stock market or economy. There are literally tens of millions of variables (if not billions or trillions) both micro and macro-economically that are rapidly changing. I am not an economist but the world and the economy, both in the US and abroad, is completely different as it was 10-20 years ago...never mind the many decades ago that we often use as "evidence" that the Boglehead philosophy is incontrovertible. How can we be so sure?
There are many variables but the basic economic framework of supply and demand and efficient markets remains. So buy the market, receive its returns, and live your life. Enjoy the time you save.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Toons »

" How can we be so sure?"

"Nobody Knows Nothing"






:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: One Bogleheads idea I have a hard time understanding...

Post by galawdawg »

Tingting1013 wrote: Sun Jun 06, 2021 2:11 pm One thing that the standard Boglehead admonition to hold only passive funds misses is that there are a lot of active mutual funds, most of which have terrible track records net of fees and can be dismissed out of hand by anyone with a familiarity with benchmarking. For example just take a look at what is available in my 401k

https://www.alightfinancialsolutions.co ... ndList.pdf

Who is going to invest in a random active large cap fund in this list that is charging 1% ER? Will that active fund underperform VOO? You bet.

But that’s not what sophisticated active fund investors do. It’s a total straw man. In fact it’s been proven that active managers with strong track records tend to sustain their outperformance:

https://www.wsj.com/articles/the-mornin ... 1508946687

Image

The average outperforming fund (with five stars) still outperforms the average underperforming fund (with one fund) ten years later.
I don't believe the linked WSJ and accompanying chart support your theory. What that chart and article only show is that after ten years, the average five star fund still outperforms the average one, two, three and four star fund. The article does not discuss how the average five star fund performs relative to a passive index fund in the long-term (and ten years is hardly "long-term" for a buy and hold investor who accumulates for thirty or forty years and continues to remain invested for decades more in retirement).

And remember, if one discards the "standard Boglehead admonition" to hold passive funds, then the average new investor would need to choose today which of thousands of actively managed funds will perform at least as well as the market, after costs, at the end of their accumulation years (and indeed into retirement). That is just not a recipe for success for most investors. As the article noted, there are a lot of "five star" funds that were superstars for years and then faded into obscurity. Not so with the index funds recommended by most Bogleheads. Actively managed funds may be the hare, but the index fund is the tortoise. :D
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Re: One Bogleheads idea I have a hard time understanding...

Post by rockstar »

That's why there is that disclaimer about past returns. Nothing is guaranteed.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Freetime76 »

Ok, so I didn’t read much except the first post.

I’d like to address the false security of all that nice data and epidemiological analysis of clinical trials, since the OP is contrasting that relative “certainty” with the myriad variables that feed into the stock market.

Clinical trials test enough sample size to achieve statistical confidence that a drug is safe and effective. The work is reviewed. In the best of worlds, it is done ethically, effective, and the product pans out over the decades as safe and effective. Consider, though, the countless variables that are either a)not tested at all, or b) insufficiently tested to draw a conclusion: individual patient genetics, dietary and social habits, individual patient metabolic differences- particularly by age/health status...the mechanism of the drug may not be completely characterized (or we think it is, but miss something that happens in X% of the population...and I’ve noticed that doctors prescribe different medications for different people based on their knowledge of the patient and possibly Rx to find a better fit. Side effects also are not the same for everyone, and neither is efficacy, and diagnosed illnesses may not be identical or well-understood. The human body is a complex wonder.

Likewise, the mere fact that the market opens, our accounts are there and we can do something with those dollars...and trade with people/institutions is a wonder. It’s influences, I am sure I don’t understand. The best evidence I have is that the market always goes up, eventually. I am not smarter than the market, nor is my (former) financial advisor.

For us, Bogleheads has these strengths:
1. It quells risks of tinkering with our investments to our own detriment.
2. Simple enough that we can actually understand and do it.
3. My spouse and I can agree on it (risk averse and not so much) :D
4. Perfection is the enemy of the good. Sure, a different investment configuration may be more fabulous, but I find we can reach our goals with Index funds and (most of) the BH dogma. And I am not sure there is perfect consensus on anything in the land of BH - loads of intelligent, respectful and sometimes a little fired up debate - but full consensus is rare.
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Re: One Bogleheads idea I have a hard time understanding...

Post by steve roy »

One of my closest and oldest friends has a PhD in economics from Cornell. Long ago he told me the following:

"Economics isn't a science because no economist can know what hundreds of millions of people will do with their money at any given point in time."
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Re: One Bogleheads idea I have a hard time understanding...

Post by Independent George »

cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
It's true to the point of tautology - the net of all trading activity is by definition the market price. It is mathematically impossible for active traders, as a whole, to beat the market, because their trades are what actually determines the market price; taken as a whole, they necessarily have to produce the total market return minus transaction costs and management fees. A broad market index, will do the same, except it will have much, much lower transaction costs and fees.

The better theoretical question is, "How do we know that markets, as a whole, will continue to rise?". The answer is, frankly, we don't know that, but it very likely will. This, once again, goes right back to definitions: buying a stock is buying a fraction of a company that does something, and makes money off of it. The market price is basically the future earnings of that company discounted by uncertainty; buying the entire market basically means you believe that, in general, humanity as a whole will continue to learn, grow, and generally improve through productive work. This is not guaranteed, but if you look at the broad historical trend over the last, say, 3,000 years, this is generally true (though it really accelerated like crazy in the last 300 or so).
Last edited by Independent George on Sun Jun 06, 2021 5:27 pm, edited 1 time in total.
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Re: One Bogleheads idea I have a hard time understanding...

Post by dbr »

Independent George wrote: Sun Jun 06, 2021 5:20 pm
cone774413 wrote: Sat Jun 05, 2021 5:04 pm
JBTX wrote: Sat Jun 05, 2021 4:58 pm A broad low fee index fund will always beat the average of all active investors once fees are taken into account, by definition.
This is what I don't understand. How can you make that claim? Who's definition? What is the evidence?
It's true to the point of tautology - the net of all trading activity is by definition the market price. It is mathematically impossible for active traders, as a whole, to beat the market, because their trades are what actually determines the market price; taken as a whole, they necessarily have to produce the total market return minus transaction costs and management fees. A broad market index, will do the same, except it will have much, much lower transaction costs and fees.
The whole point of active investing is to pay someone who is a winner against the people you need to avoid who are losers. You find out which are going to be the winners by asking them :oops:
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Re: One Bogleheads idea I have a hard time understanding...

Post by Independent George »

dbr wrote: Sun Jun 06, 2021 5:24 pm The whole point of active investing is to pay someone who is a winner against the people you need to avoid who are losers. You find out which are going to be the winners by asking them :oops:
Here's the thing that often gets missed by BHs - active trading has, in fact, improved dramatically over time; the kind of analysis that gets done today is far, far superior to the kind of trading that was done even just a decade ago, let alone a century ago. The problem is that everybody is doing it - it's a game of PhD quant vs PhD quant setting the market price. The absolute level of trading "skill" is undoubtedly higher than it was in the past... it's just the relative level is necessarily always going to end up at the same place: the market clearing price.

There are two rather large caveats to this, though:

1. The winners & losers do not necessarily have to follow a normal distribution - it's entirely possible (and I'd say likely) that very small portion of traders to do extremely well, while the rest of the market is slightly below average. The net of all active trades nets to the market price, but most traders actually performed below average.

2. The Grossman-Stiglitz paradox remains true - if markets everyone were to start investing passively, markets will become less efficient because no information is being exchanged on the marketplace. But once people start trading to take advantage of that inefficiency, they will eventually arbitrage out their advantage until the market becomes efficient again.
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Re: One Bogleheads idea I have a hard time understanding...

Post by Independent George »

I also want to add: hedge funds take a lot of flak here (deservedly in many cases), but I'm glad they exist. I'm perfectly happy to free ride on a bunch of rich people paying 2/20 (or more) for the privilege of making risky and concentrated bets they don't understand, which inevitably nets out to the market price.
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Re: One Bogleheads idea I have a hard time understanding...

Post by galawdawg »

Independent George wrote: Sun Jun 06, 2021 5:48 pm Here's the thing that often gets missed by BHs - active trading has, in fact, improved dramatically over time; the kind of analysis that gets done today is far, far superior to the kind of trading that was done even just a decade ago, let alone a century ago. The problem is that everybody is doing it - it's a game of PhD quant vs PhD quant setting the market price. The absolute level of trading "skill" is undoubtedly higher than it was in the past... it's just the relative level is necessarily always going to end up at the same place: the market clearing price.

There are two rather large caveats to this, though:

1. The winners & losers do not necessarily have to follow a normal distribution - it's entirely possible (and I'd say likely) that very small portion of traders to do extremely well, while the rest of the market is slightly below average. The net of all active trades nets to the market price, but most traders actually performed below average.

2. The Grossman-Stiglitz paradox remains true - if markets everyone were to start investing passively, markets will become less efficient because no information is being exchanged on the marketplace. But once people start trading to take advantage of that inefficiency, they will eventually arbitrage out their advantage until the market becomes efficient again.
Assuming that you are correct and that active trading has improved, let's do what an average investor might do who is hearing that "active funds are the way to go." I ran a Google search for "top active mutual funds" with a search period of 2010. The first result: Kiplinger's 2010 Mutual Fund Rankings (https://www.kiplinger.com/article/inves ... kings.html) So using that article, I'll use as an example, the first subsection, Large Company Stock Funds, and look at the "proven" Large Cap funds they picked as winners: FCNTX, LLPFX, YACKX and FAIRX. What were the ten year annual average returns of each of these funds as of December 2020, ten years after the article was published?

FCNTX 15.53%
LLPFX 7.32%
YACKX 11.5%
FAIRX 8.15%

And the S&P 500 in that same time? 13.83%.

So of the four top-ranked large-cap funds that Kiplinger's recommended in 2010, only one (FCNTX) outperformed Vanguard S&P 500 Index and that was by less than 2%. The other three would have resulted in returns significantly lower for those who invested in those funds versus VFIAX. So an investor choosing from those funds vs. the S&P500 index had a 25% chance of outperforming the S&P 500 and a 75% chance of underperforming the S&P 500. I'd say the odds do not favor active investing over passive investing.
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