How do you handle financial questions from friends/family?

[merkhet]

That is exactly why the B-shares were created... Buffett didn't like that people got screwed over by intermediaries.

 

I also doubt how big the impact of ETF's is. People used to invest in mutual funds with high fees that were often closet indexers anyway. Now they simply pay a low fee, and there is no pretense of what they are buying. I do think that (some) small mutual funds are able to outperform, but I think that has always been the case.

 

I agree with Heiko -- I'm not sure ETFs means crowded competitors -- perhaps it's just shifting mutual fund owners to ETF owners.  Maybe if the total number of people investing in equity vehicles is increasing...

[mikazo]

I've never thought of an S&P500 index ETF as the greatest idea for an average joe looking to invest. Odds are he will watch the value of his holdings, and if it drops like 2008, fear will take over, he will sell, and money will be lost.

 

I've always thought that a good Dividend Aristocrat type of index ETF would be better. You still get a wide variety of large-cap quality companies with dividend growth potential, and the income from the ETF helps calm fears when the market takes a downturn because money is still coming in, despite the loss in market value. It helps you hold on through the bad times.

[Palantir]

^DVY. But that adds some sector bias.

[rkbabang]

I agree with most of what everyone has said here. People, both friends and family, ask me for advice often, but as far as I know no one has ever taken the advice that I've given.  Just one recent example: A family member called me from a vacation in Vegas telling me that he was about to buy a timeshare and asked me what I thought.  I told him it was a terrible idea, and that since he was in his early 50's without a penny of retirement savings that if he had that extra money every month to pay for the 10 year timeshare loan he was planning on applying for, then he should instead put it into his 401K that he isn't contributing to.  Of course that wasn't what he wanted to hear and he bought the timeshare.  You can lead a horse to water, but you can't make him think.

 

[matjone]

I agree there is a lot to be desired in index investing.  What she should do is read Bogle, Buffett, Graham and Murray Stahl and then make her own decision.

 

If she had access to Sanjeev or Sonkin or somebody that would be different.  She'll probably be able to save 1% or so on the expense ratio buying the index instead of the managed funds.  Betting that someone will outperform by more than 1% when they are running 15 B or whatever just doesn't seem worth the risk. Especially when you are betting their money instead of your own.

 

[ni-co]

That is exactly why the B-shares were created... Buffett didn't like that people got screwed over by intermediaries.

 

I also doubt how big the impact of ETF's is. People used to invest in mutual funds with high fees that were often closet indexers anyway. Now they simply pay a low fee, and there is no pretense of what they are buying. I do think that (some) small mutual funds are able to outperform, but I think that has always been the case.

 

I agree with Heiko -- I'm not sure ETFs means crowded competitors -- perhaps it's just shifting mutual fund owners to ETF owners.  Maybe if the total number of people investing in equity vehicles is increasing...

 

This is a very interesting question. Until recently, I also recommended broad market ETFs to my friends/family. However, I started to wonder about the long term effects of this huge indexing/ETF movement.

 

Compared to mutual funds, there is a difference: E.g. all S&P 500 index ETFs give their positions exactly the same weighting in their portfolios. There seems to be a potentially destabilizing element built into this provided more and more people are buying exactly the same portfolios. Then again, there has always been the tendency of most of the mutual fund managers to hug their benchmarks.

 

What do you think? Is this increasing the systematic errors of market cap weighting? At least, the chance of outperforming the market with differing (value) strategies might increase as a result (which is what Greenblatt seems to be observing in his third book – which gets far to little credit, by the way).

[WideMoat]

However, I started to wonder about the long term effects of this huge indexing/ETF movement.

 

Compared to mutual funds, there is a difference: E.g. all S&P 500 index ETFs give their positions exactly the same weighting in their portfolios. There seems to be a potentially destabilizing element built into this provided more and more people are buying exactly the same portfolios. Then again, there has always been the tendency of most of the mutual fund managers to hug their benchmarks.

 

What do you think? Is this increasing the systematic errors of market cap weighting?

 

There is an additional problem with indexing as well--that the major indices are float-adjusted. See, e.g., [http://us.spindices.com/documents/index-policies/methodology-sp-float-adjustment.pdf]  Companies with significant insider ownership now have significantly less impact on index returns than the past.

 

Murray Stahl, Steven Bregman, and Horizon Kinetics have been talking and thinking about this for some time.

 

 

[Packer16]

There may be some of this but the cost advantage of indexing is so great (John Bogle estimates over 2% per year on a PT basis, even more AT) that the momentum for this effect will continue to get stronger.  We have yet to see this in the data of asset managers as they continue to underperform on  a pre-fee basis.  In the large cap space (where most of indexing is occurring) you would expect to see this effect first, however, in the large cap space it still the most difficult market cap size to outperform the index in part due to all the players there.  There are occasional mispricings but not over long periods of over a large number of firms.  Look and Longleaf as an example.  Here is a shop with a great process but  has underperformed for many years.  My take is space they are playing in large cap US is probably as close to efficient as you can get, so most of the time most of the securities are fairly priced.  Therefore, it is difficult to get a diversified group of stocks to outperform the index.  If you are willing to focus on few names and concentrate your bets in what you know well you can do well (Fairholme and Sequoia) but that is the only way to beat the index in the large cap space.

 

Packer