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On why index funds are not such a safe bet necessarily: http://charleshughsmith.blogspot.com/2016/01/the-illusion-of-safety-index-funds-are.html http://charlesh

On why index funds are not such a safe bet necessarily: http://charleshughsmith.blogspot.com/2016/01/the-illusion-of-safety-index-funds-are.html http://charleshughsmith.blogspot.com/2016/01/the-illusion-of...

yason 11y ago
To quote: "What is left unsaid is that if the broad market declines 50%, index funds also plummet 50%." The article is just stupid. If someone doesn't realize that the index funds will go up and down based on the very market they're indexing, and that all markets go up and down all the time, maybe that someone should just consume their money so that people with more wits can take better care of them. Who would be such an idiot to claim they're "safe" in the first place? Any investing is never "safe": you can always risk losing part of your money, even if you invest in a house. Not investing your money isn't safe either. Indexes can certainly dip for years: that's why you manage your risk and only invest money you don't need that much so that you don't have to cash in your investment during bad times. As long as the economy grows the growth will eventually be reflected in the indexes. Even a single 10-year period with a common stock index lower in the end rather than in the beginning would be, in practice, a rare occasion. Most depressions are over in a few years. Some continents can tank longer but you will want to buy indexes from different areas of the world anyway. Or you can only buy your local indexes, making sure you will yourself go up and down with the indexes you buy. An index will grow a few percent annually in the average, compounded. This is over decades which imply bad years and very good years. To buy the most passive index funds that have the smallest operating costs and letting your money sit in there is more and more likely to beat active funds and individual stock picking simply by waiting for the years to go by. Any costs saved by skipping active management fees or stock transaction fees will accumulate into your earnings instead.
- iaskwhy 11y ago
  Can you expand on "Not investing your money isn't safe either."?
  - mseebach 11y ago
    Cash is at the whim of the government. When Icesave crashed in 2008, the Icelandic government refused to honour deposit insurance. I haven't followed the case, but it seems that depositors have started getting their money back. Cyprus confiscated 48% of all uninsured deposits in 2013, IIRC, at the time, they considered digging into the insured deposits as well. Greece was on the brink of leaving the Euro, imposing strict capital controls for over a month last summer. Had they left the Euro, all deposits would like have been forcefully converted to a new non-Euro currency, worth substantially less. Finally, practically all mature countries (ie. those issuing cash you might want to hold) maintain some level of inflations, so you have a constant, negative return on any cash holdings. Even US treasury bonds and UK gilts, which isn't cash, and isn't "not investing", but is among some of the absolute safest investments, just barely keeps up with inflation.
    - iaskwhy 11y ago
      I understand your point but the specifics about the European Union countries have changed a little since 2008, meaning nowadays all EU countries banks savings are really saved in any case up to 100k euros. This way, isn't money (up to 100k euros) considered safe in your view? Inflation is something you still need to keep your eyes on but was there ever a case (say, in the last 10, 20 years) in the EU were inflation was higher than the median savings account interest rates? I honestly have no idea but I know for sure since 2011 interest rates have always been higher than the inflation rate in the UK, for example. If this were a fact of savings accounts in the EU then inflation is not really something to be affraid of. Obviously I'm using "save" as "making just a bit of a money while taking zero risk".
      - valdiorn 11y ago
        Cash is eroded away by inflation. If your currency hits high inflation for years continuously, like we had in Iceland (yes, I'm from there), going up to 25%, your cash isn't worth shit in 5 years time. I've experienced that. My parents experienced that. They had no "investments", kept their money in low-interest savings accounts, yet somehow their life savings was no longer enough to buy a used Toyota. Want to get more strange? What about war? How much is your money worth in case WW3 breaks out? Hardly likely? sure. Is it possible? absolutely. The point is, nothing is "safe", just different levels of risky.

yason 11y ago

To quote: "What is left unsaid is that if the broad market declines 50%, index funds also plummet 50%." The article is just stupid. If someone doesn't realize that the index funds will go up and down based on the very market they're indexing, and that all markets go up and down all the time, maybe that someone should just consume their money so that people with more wits can take better care of them. Who would be such an idiot to claim they're "safe" in the first place? Any investing is never "safe": you can always risk losing part of your money, even if you invest in a house. Not investing your money isn't safe either. Indexes can certainly dip for years: that's why you manage your risk and only invest money you don't need that much so that you don't have to cash in your investment during bad times. As long as the economy grows the growth will eventually be reflected in the indexes. Even a single 10-year period with a common stock index lower in the end rather than in the beginning would be, in practice, a rare occasion. Most depressions are over in a few years. Some continents can tank longer but you will want to buy indexes from different areas of the world anyway. Or you can only buy your local indexes, making sure you will yourself go up and down with the indexes you buy. An index will grow a few percent annually in the average, compounded. This is over decades which imply bad years and very good years. To buy the most passive index funds that have the smallest operating costs and letting your money sit in there is more and more likely to beat active funds and individual stock picking simply by waiting for the years to go by. Any costs saved by skipping active management fees or stock transaction fees will accumulate into your earnings instead.

iaskwhy 11y ago
Can you expand on "Not investing your money isn't safe either."?
- mseebach 11y ago
  Cash is at the whim of the government. When Icesave crashed in 2008, the Icelandic government refused to honour deposit insurance. I haven't followed the case, but it seems that depositors have started getting their money back. Cyprus confiscated 48% of all uninsured deposits in 2013, IIRC, at the time, they considered digging into the insured deposits as well. Greece was on the brink of leaving the Euro, imposing strict capital controls for over a month last summer. Had they left the Euro, all deposits would like have been forcefully converted to a new non-Euro currency, worth substantially less. Finally, practically all mature countries (ie. those issuing cash you might want to hold) maintain some level of inflations, so you have a constant, negative return on any cash holdings. Even US treasury bonds and UK gilts, which isn't cash, and isn't "not investing", but is among some of the absolute safest investments, just barely keeps up with inflation.
  - iaskwhy 11y ago
    I understand your point but the specifics about the European Union countries have changed a little since 2008, meaning nowadays all EU countries banks savings are really saved in any case up to 100k euros. This way, isn't money (up to 100k euros) considered safe in your view? Inflation is something you still need to keep your eyes on but was there ever a case (say, in the last 10, 20 years) in the EU were inflation was higher than the median savings account interest rates? I honestly have no idea but I know for sure since 2011 interest rates have always been higher than the inflation rate in the UK, for example. If this were a fact of savings accounts in the EU then inflation is not really something to be affraid of. Obviously I'm using "save" as "making just a bit of a money while taking zero risk".
    - valdiorn 11y ago
      Cash is eroded away by inflation. If your currency hits high inflation for years continuously, like we had in Iceland (yes, I'm from there), going up to 25%, your cash isn't worth shit in 5 years time. I've experienced that. My parents experienced that. They had no "investments", kept their money in low-interest savings accounts, yet somehow their life savings was no longer enough to buy a used Toyota. Want to get more strange? What about war? How much is your money worth in case WW3 breaks out? Hardly likely? sure. Is it possible? absolutely. The point is, nothing is "safe", just different levels of risky.