Will indexers be dissapointed...

[Jurgis]

Superb post.  I also think long term indexing is probably right for most people, but each and every one of these points is relevant and means that those who choose to invest a lot of time in it can do better than indexing.

 

I think this is irresponsible claim. As we can see from polls I ran on CoBF, even picking from best of the best (which we probably agree are on this board  :) ) even after survivorship and self-selection bias less than half outperform an index. Let's present these odds rather than saying that anyone who puts in time and thought will edit: can outperform.

[petec]

Superb post.  I also think long term indexing is probably right for most people, but each and every one of these points is relevant and means that those who choose to invest a lot of time in it can do better than indexing.

 

I think this is irresponsible claim. As we can see from polls I ran on CoBF, even picking from best of the best (which we probably agree are on this board  :) ) even after survivorship and self-selection bias less than half outperform an index. Let's present these odds rather than saying that anyone who puts in time and thought will outperform.

 

I said they can outperform, not they will, although I can see it was unclear! 

 

To be honest though, I think what's more interesting is that investors in outperforming active funds still underperform, because they buy high and sell low.  That's the key problem, and it is far more costly than the average underperformance of an active fund.  Indexing doesn't fix that problem.

 

I don't think it is a coincidence that most people's best savings product will probably be the one they are contractually obliged to pay into: their house (via mortgage repayments).

[Jurgis]

Update on Morningstar basic screener: I give up.  8)

I set it for 5-year SP500 outperform, 10-year SP500 outperform and I get funds like this:

 

http://www.morningstar.com/funds/XNAS/GXXAX.LW/quote.html

 

WTH? Am I misunderstanding the results? Isn't this fund underperforming SP500 for pretty much every time period?

 

If someone knows free fund screener that does 5-10-15 y comparison vs SP500 and works, let me know. I'd be interested to dig through results.

[bbarberayr]

Timely WSJ article on this topic:

 

http://www.wsj.com/articles/are-fund-managers-doomed-making-the-case-for-passive-investings-triumph-1476798977

[Jurgis]

I said they can outperform, not they will, although I can see it was unclear! 

 

No, that was my fault. I should have said: Let's present these odds rather than saying that anyone who puts in time and thought can outperform.

 

I am going to edit my post to make this change.

[randomep]

I agree that for most people indexing is fine, but I would like to add some points:

- Most active funds underperform because they are almost invested in exactly the same way than the index and then you have to take into account the costs. Usually these are the big institutions where having instead of 10% in oil stocks just 8% is already a big decision.

- 80% of active funds underperform after 5 years are the statistics, but don't forget that 100% of passive funds underperform all the time

- For me it is just impossible to invest in passive strategies that are market weighted indexes.  It is just pure logic: with those strategies you have of the most expensive most and of the least expensive the least, which is contrary to all logic.

- If you accept to have 50% of your assets in Japan in 1990 or 50% in Dotcom in 2000 or 35% in banks in 2007 then you should invest passively.  But I can't accept this. I just believe it is stupid.

- So even if you just perform in line with the index after 20 years, but have been able to avoid those big bubbles, you have done a good job...and slept much better.

- Last point: the more popular the passive investing is becoming, the more worried you should be.  Go elsewhere to find bargains, because all the large caps, heavy weights will become very expensive compared to the rest of the market.

 

Superb post.  I also think long term indexing is probably right for most people, but each and every one of these points is relevant and means that those who choose to invest a lot of time in it can do better than indexing.

 

 

There is something I really don't understand when some wise investor says a person should invest in index. Invest in which index? Most of us think of S&P500, but that's probably cos most of us are in north america or are influenced by American financial markets. But what would the recommend to someone in Japan?  Is the logic to simply invest in your home country's index?  You can see what is disaster it would be if one did that for 20yrs in Japan.  So come to the present and one could still make a similarly bad decision investing in the S&P500 index.  I am becoming more convinced that the next 20yrs will have really subpar stock market growth in the US.  In that case fast foward 20yrs and we'll be saying indexing doesn't work. Saying to go index is just another fad, albiet one with much less risk.

 

Indexing is not a substitute for thought, if one buys 100% S&P500 index one has to made the decision to do so because there are so many indicies out there not to mention bonds insteads of stocks.

 

I don't know if the investing public realizes Graham talked at length about the investment allocation for much of the Intellingent Investor.

 

 

 

[Jurgis]

There is something I really don't understand when some wise investor says a person should invest in index. Invest in which index? Most of us think of S&P500, but that's probably cos most of us are in north america or are influenced by American financial markets. But what would the recommend to someone in Japan?  Is the logic to simply invest in your home country's index?  You can see what is disaster it would be if one did that for 20yrs in Japan.  So come to the present and one could still make a similarly bad decision investing in the S&P500 index.  I am becoming more convinced that the next 20yrs will have really subpar stock market growth in the US.  In that case fast foward 20yrs and we'll be saying indexing doesn't work. Saying to go index is just another fad, albiet one with much less risk.

 

Perhaps you should listen to John Bogle before writing this...

[chrispy]

Why not purchase a mix of berkshire, fairfax and markel for the long term and cost average? If you buy around the average P/B and let it ride, avoid purchasing much when P/B~2, it seems like you would have superior returns to the market.  Buying at P/B~1 or 1.2 is ideal but if you purchase at the average price and the company compounds at a rate greater than the market, you have outperformed the market.

 

This would require only a little more of your time then simply throwing your money into VFINX.  Thoughts?

 

My grandfather put money into VFINX for me in the early 90s and it was never looked at except to pay taxes on.  No one paid enough attention to it during the past 20+ years to panic and sell at the bottom and therefore it did pretty well.  Listening to Bogle a few years later made complete sense....

 

Of course I wish my pop wouldve chosen BRKA though!

[Graham Osborn]

If someone is willing to hold through a bear market or two and keep investing passively and dollar-cost average through those times, then the person will probably be better off staying in passive. What I envision is people abandoning ship at the bottom and try to chase active management in order to "make up" for lose ground.

 

Personally, I always recommend passive for my own family (and half of my own portfolio is passive) but I constantly remind them do keep buying and to stay the course even while the markets are going down.

 

Imagine if you had done that in Japan around 1990.  The basic premise of indexing is you diversify away single-security risk, enabling sector or market performance to shine through.  Buying sector indices without due sector analysis is incredibly dumb; buying market indices without market analysis is less dumb, but still dumb.  The reason is that no trend lasts forever - virtually all systems exhibit periodicity at some point.  This applies to what the S&P has done over the past 100 years.  Think about that - 3 generations of deeply ingrained belief that the trend will always be maintained.  For such people only 3 things in life are guaranteed - death, taxes, and ultimately rising US equity markets.

 

As other posters have noted, index funds get pumped up in mature bull markets, driving trillions into blue-chip favorites.  That's one reasons outside of fundamentals I bought GOOGL a few months ago - I remembered what happened to MSFT in the late 90s thanks to the magic of indexing.

 

And don't forget what happened with ETFs in October 2015.  Funny how index funds can (and do) underperform their indices.

[Jurgis]

Why not purchase a mix of berkshire, fairfax and markel for the long term and cost average?

 

That's partially what I am doing.

 

Issue with this: BRKA - Buffett may die soon; personally I don't think it will do well after Buffett. Fairfax - you can read about Fairfax issues on CoBF and decide whether it will outperform market going forward. ;) MKL - rather expensive right now.

[DooDiligence]

There is something I really don't understand when some wise investor says a person should invest in index. Invest in which index? Most of us think of S&P500, but that's probably cos most of us are in north america or are influenced by American financial markets. But what would the recommend to someone in Japan?  Is the logic to simply invest in your home country's index?  You can see what is disaster it would be if one did that for 20yrs in Japan.  So come to the present and one could still make a similarly bad decision investing in the S&P500 index.  I am becoming more convinced that the next 20yrs will have really subpar stock market growth in the US.  In that case fast foward 20yrs and we'll be saying indexing doesn't work. Saying to go index is just another fad, albiet one with much less risk.

 

Perhaps you should listen to John Bogle before writing this...

 

I read Clash of the Cultures last month.

 

I'm already a believer with VTI, VXUS & VDE (been $ cost averaging the 1st 2 for years & bought VDE opportunistically when oil hit $30.)

 

I still make picks which I believe fall into the Buffet partnerships Generals Relatively Underpriced category & view the fund investments as the hedges of a scaredycat...

[rkbabang]

To be honest though, I think what's more interesting is that investors in outperforming active funds still underperform, because they buy high and sell low.  That's the key problem, and it is far more costly than the average underperformance of an active fund.  Indexing doesn't fix that problem.

 

I don't think it is a coincidence that most people's best savings product will probably be the one they are contractually obliged to pay into: their house (via mortgage repayments).

 

That is exactly true.  How many times do people panic and cash out at or near the bottom, then wait until the almost the top to decide that they should start investing again.  It doesn't matter what type of funds you choose if this is your "strategy".

 

[tede02]

To be honest though, I think what's more interesting is that investors in outperforming active funds still underperform, because they buy high and sell low.  That's the key problem, and it is far more costly than the average underperformance of an active fund.  Indexing doesn't fix that problem.

 

I don't think it is a coincidence that most people's best savings product will probably be the one they are contractually obliged to pay into: their house (via mortgage repayments).

 

That is exactly true.  How many times do people panic and cash out at or near the bottom, then wait until the almost the top to decide that they should start investing again.  It doesn't matter what type of funds you choose if this is your "strategy".

 

Totally agree. My prediction is that the same phenomenon will occur with index funds. Investors will underperform because of fear/greed based decisions and lack of patience. 

[DooDiligence]

To be honest though, I think what's more interesting is that investors in outperforming active funds still underperform, because they buy high and sell low.  That's the key problem, and it is far more costly than the average underperformance of an active fund.  Indexing doesn't fix that problem.

 

I don't think it is a coincidence that most people's best savings product will probably be the one they are contractually obliged to pay into: their house (via mortgage repayments).

 

That is exactly true.  How many times do people panic and cash out at or near the bottom, then wait until the almost the top to decide that they should start investing again.  It doesn't matter what type of funds you choose if this is your "strategy".

 

There's another thread somewhere on here about frugality & contentment.

 

"Success is having what you want & happiness is wanting what you have"

 

Restless minds grasping for happiness lead to impatience & poor returns...

[rkbabang]

To be honest though, I think what's more interesting is that investors in outperforming active funds still underperform, because they buy high and sell low.  That's the key problem, and it is far more costly than the average underperformance of an active fund.  Indexing doesn't fix that problem.

 

I don't think it is a coincidence that most people's best savings product will probably be the one they are contractually obliged to pay into: their house (via mortgage repayments).

 

That is exactly true.  How many times do people panic and cash out at or near the bottom, then wait until the almost the top to decide that they should start investing again.  It doesn't matter what type of funds you choose if this is your "strategy".

 

There's another thread somewhere on here about frugality & contentment.

 

"Success is having what you want & happiness is wanting what you have"

 

Restless minds grasping for happiness lead to impatience & poor returns...

 

It isn't always impatience.  I think for many people it is just loss aversion and fear of what they don't understand.  They don't want to know anything about investing, so they put their money in funds where they can just set it and forget it.  This seems like a great idea to them when stocks are going up, they glance at their statements every quarter and don't think much of it.  But after a crash they decide that maybe stocks are just way too risky for them and they pull everything out.  A few years later when they see stocks have been doing well again for a while they think that the set it and forget it stock investing method is just what they should be doing again.  I've struggled with this with my parents for years.  For example during the financial crisis crash I got panicked calls from them wondering if they should sell all of their stocks.  I got them to stay invested and even invest more and they eventually thanked me, but they were skeptical and scared.  I was trying to convince a co-worker of the same, but I had less influence over him and he got out of the market.  He said I was crazy.  This was an engineer, not a dumb guy.  The question of when to invest is far more important than what to invest in for the average person I think.

 

[CorpRaider]

I think they will get no/low tracking error and will not, therefore, be disappointed.  Will the dollar weighted average performance lag whatever the strategy is? Yeah, probably.  But investors who have given up trying to outperform the market via security selection will probably be less likely/tempted to try and outperform by market timing.

 

Greenblatt has stated this idea well and has been quoted elsewhere on this site.  Something to the effect of only one branch in the decision tree so less opportunity to screw up (by piling into/out of strategy/fund at wrong time and piling into/out of market after period of strong/weak performance).

 

I also think RPV, fundamental indexes and maybe even IUSV will probably kick most of our asses (mine included) over the long term.

[DooDiligence]

I agree (my previous post was a bit narrowly focused.)

 

I had the same problem with my Mom & Sister back in 08 & again in Jan (can't remember all the other hand holding I did in between.)

 

With my Mom it was "oh my God I'm losing money" in 08 until I convinced her the divvies weren't stopping (and that's all she truly cared about.)

 

My Sister has been easier to convince but yeah you're right; poor understanding & short termism blinds many people.

 

I trot out that story about Buffett & the farm purchase (highlighted it from my Kindle copy of the Letters to Shareholders) it's a passage that resonates well.

[Jurgis]

It isn't always impatience.  I think for many people it is just loss aversion and fear of what they don't understand.  They don't want to know anything about investing, so they put their money in funds where they can just set it and forget it.  This seems like a great idea to them when stocks are going up, they glance at their statements every quarter and don't think much of it.  But after a crash they decide that maybe stocks are just way too risky for them and they pull everything out.  A few years later when they see stocks have been doing well again for a while they think that the set it and forget it stock investing method is just what they should be doing again.  I've struggled with this with my parents for years.  For example during the financial crisis crash I got panicked calls from them wondering if they should sell all of their stocks.  I got them to stay invested and even invest more and they eventually thanked me, but they were skeptical and scared.  I was trying to convince a co-worker of the same, but I had less influence over him and he got out of the market.  He said I was crazy.  This was an engineer, not a dumb guy.  The question of when to invest is far more important than what to invest in for the average person I think.

 

Yes, right. A lot of my engineer friends are so clueless about investing that it's scary. The worst ones don't even invest into our company's super-great ESPP that guarantees 15% return. And then there's a step ladder of various misconceptions from that.

 

I think the problem of this thread is that it conflates two quite different topics:

 

1. Will serious professional investors like people frequenting CoBF be disappointed with index performance going from this point. And what such people should do.

2. Will Joe and Jane Average be disappointed with index performance sometime in the future and/or leave indexes at the wrong time.