What are the drawbacks,if any,of the Boglehead philosophy?

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redrock
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What are the drawbacks,if any,of the Boglehead philosophy?

Post by redrock »

This is my favorite investment forum and there are many quotes/statistics with respect to the merits of the Boglehead method of investing one's assets. Can anyone articulate the drawbacks,if any,of this philosophy? I don't know if this question is politically correct on the forum but I would be interested in hearing any contrarian viewpoints which would help in making informed investment decisions.
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bob90245
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Re: What are the drawbacks,if any,of the Boglehead philosoph

Post by bob90245 »

redrock wrote:Can anyone articulate the drawbacks,if any,of this philosophy?
It is hard. Many (most?) do-it-yourself investors underestimate their risk tolerance and then sell in a panic during a severe bear market.
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Post by muck53 »

The only drawback I can think of, is that your time horizon is too short, for it to work out well. No one can define what is too short, or just right, or long enough. It is based on 80 to 100 years of data (someone correct me if I am wrong on this). Whichever 20 year, 40 year, 60 year slice of time you are set down in - may exceed, match, or fail to meet, that 80 to 100 years of history.

Hence why risk, gets paired back, the shorter your time horizon gets, as you age.
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Post by PatrickS »

It's boring because you don't trade much.
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Post by hamishdad »

Like any good investment plan, it might work well for you, or it might not.
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menthol
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Post by menthol »

PatrickS wrote:It's boring because you don't trade much.
You beat me to it. I was about to post the same thing. :)
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Post by mikep »

You'll never own the #1 ranked mutual fund any given year.
Another drawback is that it's not a get rich quick scheme - it takes a long time.
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Post by LadyGeek »

For reference, it's summarized here: Please see Bogleheads Investment Philosophy on the Bogleheads Wiki.
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Post by hewhomustnotbenamed »

Mental ossification is a possibility.
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Post by juhrio »

no real risk management as far as I can tell. there is a definate buying against selling.

I mean, what if the 50% loss you feel you can take turns into a 60, 70, 80, or 90% loss like what happened during the great depression?

lack of gold or precious metals in a portfolio.

inability to deal with bear markets.
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Post by linuxizer »

juhrio wrote:inability to deal with bear markets.
I'm dealing with this bear market quite well, thank you. Down 3% since September, thanks to not panicking and continuing to buy as planned.
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Post by hewhomustnotbenamed »

juhrio wrote:no real risk management as far as I can tell. there is a definate buying against selling.

I mean, what if the 50% loss you feel you can take turns into a 60, 70, 80, or 90% loss like what happened during the great depression?

lack of gold or precious metals in a portfolio.

inability to deal with bear markets.
I disagree.
True Risk management is action that is taken before the risk shows up ,and the boglehead philosophy does a good job of addressing this in my opinion.

Sometimes there is a mismatch between belief and practice. This is where emotional maturity and experience play a huge role.
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Post by Bharat »

linuxizer wrote:
juhrio wrote:inability to deal with bear markets.
I'm dealing with this bear market quite well, thank you. Down 3% since September, thanks to not panicking and continuing to buy as planned.
Ditto, i will break even with just another 5% jump in the indexes.
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Post by Boglenaut »

It makes a lousy hobby... day traders have much more excitement.
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Post by pkcrafter »

You don't get to act like a big shot, know-it-all idiot?

You won't be the center of attention at parties?

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Post by linuxizer »

No chance of breaking no banks of no countries.
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Post by eurowizard »

+1 for Boring. If everyone on this forum was really 100% boglehead, then there would be 5 Sticky posts and 1 new post every few weeks. 99% of the posts generated here are about market timing and doubting the boglehead philosophy.
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Taylor Larimore
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The Boglehead Philosophy is hard to believe . .

Post by Taylor Larimore »

Hi Redrock:
What are the drawbacks,if any,of the Boglehead philosophy?
First, a brief summary of the Boglehead Philosophy as stated in Mr. Bogle's "Twelve Pillars of Wisdom":

Pillar 1. Investing Is Not Nearly as Difficult as It Looks
Pillar 2. When All Else Fails, Fall Back on Simplicity
Pillar 3. Time Marches On
Pillar 4. Nothing Ventured, Nothing Gained
Pillar 5. Diversify, Diversify, Diversify
Pillar 6. The Eternal Triangle
Pillar 7. The Powerful Magnetism of the Mean
Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds
Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both
Pillar 10. Beware of "Fighting the Last War"
Pillar 11. You Rarely, If Ever, Know Something The Market Does Not
Pillar 12. Think Long-Term

For a full description and better understanding use this link:

The Twelve Pillars of Wisdom

In my opinion, the biggest drawback is that the Boglehead Philosophy is difficult to believe:

* It is hard to believe that inactivity usually has better results.

* It is hard to believe that the lower the cost the better the product.

* It is hard to believe that past performance does not predict future performance.

* It is hard to believe that most "experts" cannot "beat the market."

* It is hard to believe that most managed funds underperform most index funds.

* It is hard to believe that simplicity is usually better than complexity.

Academic research on which the Boglehead Philosophy is based, has shown the above statements are true. Unfortunately, this research is virtually inknown to the investing public. Instead, we are subject to the steady drumbeat of Wall Street's marketing machine attempting to take a portion of our earnings for themselves.
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by VennData »

I would add that it's hard to believe it takes less time.

Also it can difficult to move from your current "investment approach" to the Bogglehead approach for all sorts of reasons: Your 401(k), your in annuities, your spouse doesn't buy off, you don't fully buy off and aren't sure how to do it. etc... etc...
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Post by FrugalInvestor »

If you prefer gambling over investing, then the Boglehead way is no fun.
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Post by fishnskiguy »

The Bogleheads way leaves you with too much free time for other things. What's that line about idle hands and the Devil? 'Scapes me at the moment :) .

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Re: What are the drawbacks,if any,of the Boglehead philosoph

Post by tfb »

redrock wrote:This is my favorite investment forum and there are many quotes/statistics with respect to the merits of the Boglehead method of investing one's assets. Can anyone articulate the drawbacks,if any,of this philosophy? I don't know if this question is politically correct on the forum but I would be interested in hearing any contrarian viewpoints which would help in making informed investment decisions.
You may become jealous of some other funds which did better than yours. You can't brag about dodging the bear market because you saw it coming.
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Post by TheEternalVortex »

PatrickS wrote:It's boring because you don't trade much.
Yes, this is the main drawback for me.
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Post by MarkNYC »

The significant additional wealth accumulation that results from the long-term compounding of seemingly small annual cost savings is difficult for the average investor to grasp. And the incremental wealth accumulated, although real, is largely invisible. And due to the nature of long-term compounding, most of the financial benefit occurs late in the compounding period. Most people want to see tangible benefits, and they don't want to wait.
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Post by avalpert »

juhrio wrote:no real risk management as far as I can tell.
It completely premised on a method of risk management - diversification across and within asset classes.

As for actual downsides - lack of big upside. Since it is designed to manage downside risk you do give up the potential of a big apyoof - as remote as it might be. So as others have said, it isn't going to scratch that gamblign itch - but that is what casinos are for.
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Post by danbek »

A quote perhaps relevant to the discussion ...
The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.
(Keynes, The General Theory of Employment, Interest and Money)
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Re: What are the drawbacks,if any,of the Boglehead philosoph

Post by sommerfeld »

redrock wrote:Can anyone articulate the drawbacks,if any,of this philosophy?
It can lead to elevated blood pressure whenever you hear someone trashing index funds or extolling actively managed funds, especially when they use clearly fallacious logic in doing so.
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Post by bhmlurker »

Biggest drawback is that there's no instantaneous gratification. No intra-day or intra-week trades that paid for going to dinner at a nice restaurant or a vacation. Here it's just patience, patience, and more patience.

Not only that, one has to stomach watching his/her portfolio lose half the value and still stay the course. Strangely enough for some it may be less painful to tinker with his/her portfolio as the market crashed, resulting in higher than 50% loss, and somehow still feel better because some adjustment/tinkering was done.
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Post by sschullo »

My point involves policy change for employer sponsered retirement plans. If one has a fantastic opportunity to be a member of the Oversight Advisory Committee involving tens of thousands of your fellow employees, you would have little or no support for indexing. Your fellow members may be sympathetic but don't know enough or confident enough to support you because they would be going directly against the professional consultant who believes, lives, thinks and dreams active management style. You would have little chance because the "professional" carries a lot of weight. Furthermore, Vanguard cannot or will not send a representative to talk to the committee. To do so would probably require an increase in fees to change their policy. Consequently and regrettably, there is no organized infrastructure, not yet anyway, to continue the message from a policy standpoint to outside enterprises, both public and private, to implement passive strategy throughout the country. The employees themselves would require education and that would take time and more money.
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Risk management

Post by Taylor Larimore »

"No real risk management as far as I can tell."


This is incorrect. A basic precept of Boglehead investing is to structure an asset-allocation plan based on our goals, time-frame, risk-tolerance and personal financial situation--then stay-the-course.

In addition, Mr. Bogle recommends a percentage of bonds similar to our age which provide simple and effective "risk management."
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by englishgirl »

bhmlurker wrote:Not only that, one has to stomach watching his/her portfolio lose half the value and still stay the course.
Ahh, but if we set our asset allocation well in the first place by facing up to the fact that we weren't prepared to stomach a 50% loss, it wasn't such a big shock to go through the bear market because we'd already mentally planned for it. And I for one didn't lose half. Because, you know, I'd set my asset allocation accordingly.

Drawbacks? I really don't see myself as doing any investing. I did that once, several years ago. Now I tinker with my spreadsheet, and see which "bucket" I need to top up with new money. The rare excitement of rebalancing is just that - rare!
Sarah
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Post by Justin618 »

The biggest drawback for me is it is frustrating to watch family members hand everything over to their trusted advisor.

Justin

(I dont have any gambler's need for the "juice" aka excitement of risk)
"Investing is simple, but not easy" - Buffett.
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Post by Ricola »

Riding through a bear market or crash.
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Post by WalletInflation »

The biggest drawback that I can see is the strong emphasis on holding bonds. This idea may not be beneficial for young investors and those who are very risk-tolerant.

The stock market's returns are unmatchable over the very long-term, if executed correctly. For certain investors, it is possible to develop a successful portfolio allocating very little or nothing to bonds.

I love bonds. I'm not trying to talk them down, because they are great investments. I wish I could afford to invest in them. However, as a young investor who is highly risk-tolerant (and fairly educated in investing), it will cost me more over the long-term to not invest in stocks.

Other than that one small disagreement, I love the boglehead philosophy. The concepts of buy and hold, diversification, simplicity, and low costs are essential to successful investing.
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Bonds in a diversified portfolio ?

Post by Taylor Larimore »

The biggest drawback that I can see is the strong emphasis on holding bonds. This idea may not be beneficial for young investors and those who are very risk-tolerant.

The stock market's returns are unmatchable over the very long-term, if executed correctly. For certain investors, it is possible to develop a successful portfolio allocating very little or nothing to bonds.


Hi WI:

Welcome to the Bogleheads Forum!

One of the greatest financial thinkers, Peter Bernstein, passed away last week. We can all benefit from his experience and wisdom.

I am not recommending a "60/40" stock/bond allocation for you, but in this article, Mr. Bernstein certainly makes a good case for holding some bonds.

The 60/40 Solution
"Simplicity is the master key to financial success." -- Jack Bogle
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Post by dbr »

I don't believe there is any component of Boglehead philosophy that is weak due to recommending the wrong AA, whether too many bonds or the reverse. Indeed a central tenant of Boglehead philosophy is investing according to one's assessment of risk.

I think there is a Boglehead weakness with respect to execution which is lack of adequate understanding of risk and lack of tools to arrive at the correct risk assessment. That is not a problem restricted to Bogleheads.
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Re: Bonds in a diversified portfolio ?

Post by WalletInflation »

Welcome to the Bogleheads Forum!
Thanks for noticing! Glad to be here. :D
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Post by Christine_NM »

The only drawback to buying and holding the market is that once or twice in your lifetime it may cost you a lot of money over some time period if your AA is too stock-heavy, or over a long period if too bond-heavy and slow growing.

OTOH you will lose more jumping around guessing hot stocks or selling everything, so maybe it is not a drawback after all, it is just the best we can do given uncertainty.

The damage can be mitigated by a natural skepticism of too much of anything -- too many stocks, too many funds, too many bonds, too much theory, etc. A really simple diversified portfolio is easy to stick with as long as you keep adequate cash for what you need.
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Post by 3CT_Paddler »

menthol wrote:
PatrickS wrote:It's boring because you don't trade much.
You beat me to it. I was about to post the same thing. :)
Ditto. You may find yourself so bored that you get in arguments about inflation or other borderline political issues. :D
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Post by fluffyistaken »

The most likely problem is the fact that a Boglehead plan will underperform many other strategies at various points in time and quite possibly over your investing lifetime, leaving you thinking "Duh, it's so obvious in retrospect" :) The same problem is true of all those other strategies too, of course.

I do think there is a potential serious problem with a Boglehead plan. It relies on the Efficient Market Hypothesis, which is generally accepted to be true, but hardly proven beyond all doubt. In fact, I'm convinced that EMH is not absolutely 100% true since I've seen small but free lunches lasting a few days in the market, especially during this past crash.

A close relative of the faith in EMH is Boglehead belief that you cannot time the market (statistically speaking). This would have required a Boglehead to ignore warnings of people like Buffet and Bogle himself regarding the late 90s bubble. The obvious reply to that is that Buffet, Bogle, Greenspan, Schiller and many others were just lucky in their warnings. I just find that really hard to swallow regarding the 90s. I'm more inclined to accept that Roubini, Taleb, and the rest of the current Armageddon Brigade were lucky in predicting the current crash. Anyway it doesn't matter what I think but a true Boglehead wouldn't care about what anyone thinks at any point in time regarding market valuations, no matter what evidence is presented because "the market already knows all that". On the plus side, if you are a rebalancer you'd automatically soften the impact of the bubbles and crashes to some degree.

Finally I think that for better or for worse people get overly dogmatic about being a Boglehead to the point of close-mindedness. But the same is probably true of all other strategies, so it's more of a human condition issue than a problem with being a Boglehead.
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Post by Opponent Process »

it, along with the concept of life cycle investing, doesn't address one major problem facing many today, and always will: what to do if you've started investing too late in life? what if your need to take risk greatly exceeds your ability (or willingness) to take risk?

I'm not saying there's a palatable answer to this dilemma, I'm just saying that many find themselves in this position, and will no doubt find the Boglehead/life cycle approach lacking.
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Post by paddyshack »

I do think there is a potential serious problem with a Boglehead plan. It relies on the Efficient Market Hypothesis, which is generally accepted to be true, but hardly proven beyond all doubt. In fact, I'm convinced that EMH is not absolutely 100% true since I've seen small but free lunches lasting a few days in the market, especially during this past crash.


The above is the biggest issue for me. I don't believe in the EMH at all in the relative short term, and do believe that it is possible to 'beat the market' ala Buffet with value investing. However, I've realized that being good at value investing takes even more courage, a hughe amount of time, and it's certainly no sure thing. The biggest problem I have is all the lies we've seen on balance sheets, that makes accurate value investing dicey. The other drawback is that if you like to watch the market closely, the Boglehead strategy becomes much tougher.
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Post by dbr »

When need exceeds ability the problem shifts from one of finding a correct investment strategy (There is none.) to making more fundamental changes that affect the need or the ability. Some classic ones are work longer, save more, resolve debt problems, get a better job, move, marry or don't divorce, etc., etc. Some situations are just unfortunate, sometimes even tragic, but are not solvable by investing strategy.

Is Boglehead philosophy an investing philosophy, or is it more than that?
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Post by muck53 »

fluffyistaken wrote: A close relative of the faith in EMH is Boglehead belief that you cannot time the market (statistically speaking).
Another close relative is that losses don't matter, they are only paper losses.

Rule #1 Don't loose money, Rule #2 Don't break rule #1

Losses do matter. But of course, in this I am a deviant to Boglehead wisdom.

I missed the 1987 crash by 4 months, in cash. I dodged last falls mess. I was in over my head before I noticed 2000-2002. 2 out of 3 is not bad. The problem with losses, even paper losses is risk. If you never lost it in the first place, you can ratchet down your risk going forward. Loose it, and about all you can do is hope for the best, and hope your time horizon is long enough.
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Post by daniel »

paddyshack wrote:I do think there is a potential serious problem with a Boglehead plan. It relies on the Efficient Market Hypothesis, which is generally accepted to be true, but hardly proven beyond all doubt.
This is not true: "The Boglehead plan" does not rely on any theory like Efficient Market Hypothesis (EMH).

The boglehead philosophy is more about "low cost" and "diversification". These two points can be put in practice for example by using a total stock market index fund since such fund is both low cost (in fees, and in trade and tax efficiency) and highly diversified (across stocks).

Furthermore, such index fund guarantees that you get the return of that stock universe ("the market") minus the (low) cost. This is regardless of whether the stock market is efficient or not!! Getting market return is really good in practice as there always seem to be more losers than winners (especially after taking fees and tax/trade cost in consideration). Over the past decades, index funds are often in the top 20% of investor returns. I.e. with a broad index fund you are getting market return, and are in the top 20% of the investors, regardless whether the market is efficient or not!

Think about it: suppose the market has inefficiencies and you profit hugely from it by buying the right stock, then the index fund profits too as it will hold that stock too. So yes, you might get more amazing returns by trying to exploit inefficiencies (or more amazining losses 8) ) but historically the index fund has always been in that top 20% getting market returns -- regardless of market efficiency. It is all about taking risks :D
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Post by Milo »

I think the biggest drawback is that it's misunderstood. I think some people believe that when we say that we believe we can beat the majority of active fund managers......they think we are saying "follow our system and you won't lose money, or follow our system and you won't have risk, or will outperform the market." And they look at short term results and draw erroneous conclusions.
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Post by fluffyistaken »

daniel wrote:
paddyshack wrote:I do think there is a potential serious problem with a Boglehead plan. It relies on the Efficient Market Hypothesis, which is generally accepted to be true, but hardly proven beyond all doubt.
This is not true: "The Boglehead plan" does not rely on any theory like Efficient Market Hypothesis (EMH).

The boglehead philosophy is more about "low cost" and "diversification". These two points can be put in practice for example by using a total stock market index fund since such fund is both low cost (in fees, and in trade and tax efficiency) and highly diversified (across stocks).

Furthermore, such index fund guarantees that you get the return of that stock universe ("the market") minus the (low) cost. This is regardless of whether the stock market is efficient or not!! Getting market return is really good in practice as there always seem to be more losers than winners (especially after taking fees and tax/trade cost in consideration). Over the past decades, index funds are often in the top 20% of investor returns. I.e. with a broad index fund you are getting market return, and are in the top 20% of the investors, regardless whether the market is efficient or not!

Think about it: suppose the market has inefficiencies and you profit hugely from it by buying the right stock, then the index fund profits too as it will hold that stock too. So yes, you might get more amazing returns by trying to exploit inefficiencies (or more amazining losses 8) ) but historically the index fund has always been in that top 20% getting market returns -- regardless of market efficiency. It is all about taking risks :D
The reason you or I buy a stock (or bond, for that matter) index fund is because we expect to be adequately compensated for the risk we take by purchasing the fund and a big reason we expect this compensation is because we believe that these funds are fairly priced, thanks to EMH. It's definitely not because we spent countless hours analyzing all of the index holdings and calculating expected cashflows. To give an absurd example, If all traders were on meds and the markets were wildly irrational and lost 90% or gained 1000% every other day, our investing would be very different, even if the index funds costs were the same as they are now and all the same diversification options were available. Explicitly or implicitly we all rely on the EMH to a large degree. If EMH is badly flawed or outright wrong that has great potential to hurt Bogleheads (as well as many non-Bogleheads, of course). I am not saying it's a likely scenario but it is a potential problem.
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Post by daniel »

fluffyistaken wrote:To give an absurd example, If all traders were on meds and the markets were wildly irrational and lost 90% or gained 1000% every other day, our investing would be very different, even if the index funds costs were the same as they are now and all the same diversification options were available.
I see. However, "efficiency" only means that it is hard to take advantage of current knowledge get an edge in the market. This is different from "rational" markets. i.e. a market can be both irrational, and efficient. (and I believe that is actually the case in practice :D ).

Nevertheless, when you buy a stock index fund you do accept the risk of higly irrational markets (and yes, that could be a problem). Back to the original point: I think the arguments for buying the index fund do not include reliance on EMH -- the arguments are still simply getting market return at the lowest cost, without taking uncompensated "single stock" risk. This holds whether or not you believe in EMH.

Where EMH really matters in my opinion is in active management: if a market is not efficient, you can have the opportunity to profit if you actively manage your portfolio of stocks. But again, if this happens, and market return goes up, so would the index fund. There is always someone on the other side of the trade. i.e. it is a zero-sum game minus trading/tax/fees cost.
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Biggest Drawbacks to Boglehead Investment Management

Post by Paul Puckett »

1) The free time (not spent analyzing M* and other data to determine which active manager deserves a spot in your investment stable)
2) Even in those years where you have the highest return at the cocktail party, you can't claim to have "picked" a great manager.
3) Lack of stress (some people thrive on it)
4) You will never, never, never, win the championship (you will also never finish last)
5) Friends and relatives will wonder about you (which may happen anyway)
6) Active investors will look down on you (possibly jealous at times)
7) Holding a long-term view in a short-term world may be challenging
8) Lack of ability to deduct investment advisory fees (ok, you didn't really expect me to leave that out did you :lol: )
9) If using mutual funds, as opposed to ETF's, the inability to trade with limit orders when reducing holdings (that's also legit IMHO)
10) The inability to buy using limit orders.
11) You will know when the index return is reported on the news, they are talking about you!
12) Getting abused if you comment in the wrong M* forum :shock:

All I could think of for now, if I repeated anyone, consider it flattery...

Best,

Paul
Money is not your life. It is simply the means to the life that you want.
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bob90245
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Post by bob90245 »

fluffyistaken wrote:I do think there is a potential serious problem with a Boglehead plan. It relies on the Efficient Market Hypothesis, which is generally accepted to be true, but hardly proven beyond all doubt.
Quite right. It is a very serious problem.

But what do we do? Continue to look for the next Peter Lynch or Warren Buffett to try to beat the market? The odds are not in your favor. Instead, the Boglehead philosophy is to accept the returns of a benchmark index and try to keep costs as low as possible.

Remember before EMH, it was common knowledge that any skillful stock picker can do a more than adequate job of constructing a portfolio to outperform a benchmark index. This was true in the days of Benjamin Graham. But it became increasingly difficult as all the large institutional players became very skillful. And that's when the market became efficient.
Until about the early 1970’s, investing was a winner’s game. An investor could gain an edge on the market by out-thinking and out-analyzing other investors. Individual investors accounted for 90 percent of the daily trading volume on the exchanges, and they had virtually no data to work with. A smart, hardworking investor could find gold among the rocks. The pre-1970 era was the heyday of Benjamin Graham, whom some of you may know as the “father” of investment analysis and as one of Warren Buffet’s heroes.

In the modern market, professional investors with large staffs and vast
research budgets do over 90 percent of each day’s trading volume. The 50
largest institutions do 50 percent of all trades in the market. So not only are individuals competing with professionals, the professionals are competing with each other in setting the market’s direction.

Even these very smart people find it exceedingly difficult to beat the average return of the whole market.[1]
Source: http://www.creeksideadvisers.com/PDFs/WinningGame.pdf




[1]market or benchmark index
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