13 ms·
The Impact of Index Investing: A Follow-Up
- atemerev 10y agoPassive investing is popular when markets are good. And there wasn't any significant crisis since 2008-2009. When markets make a downturn, passive investing is not a great idea.
- toth 10y agoThat's true, but it's also true if you drop the "passive" part :)
- nabla9 10y agoBuying index funds in downturns provides more ling term value than buying the same index fund when markets are good.
- ryangittins 10y agoWhen the market takes a dive is the best time to invest in index funds. The problem comes when people panic and pull out their money in a recession, realizing the loss. If the market rebounds you come out ahead and if it doesn't, you've got much bigger problems. The best policy is to put money in the market every month, through the best and worst of it, especially if you're young.
- paganel 10y ago> The problem comes when people panic and pull out their money in a recession, This doesn't happen only because of panic. In a recession, by definition, bad things happen: people lose cushy jobs, they end up uninsured just before an illness happens, very close relatives (parents, kids) fall on hard times them-selves and you have to bail them out etc etc. All these new problems require liquidity, which can be very easily obtained by selling your stocks, even if at a loss. Multiply this across the whole middle-class and the end-result won't be pretty.
- mason55 10y agoWhich is why a liquid emergency fund is the first recommendation for anyone trying to secure their personal finance situation.
- paganel 10y agoI agree with you, but, then again, saving money "under the mattress" or a high saving rate is usually frowned upon in the economic press.
- ihsw 10y agoMany treat credit cards as their liquid emergency fund. Unexpected expense? Dig yourself deeper and push your credit closer to its limit. Personally I think that is the intention of credit cards -- emergency liquidity -- and that nobody should carry credit card debt to the next month.
- ryangittins 10y agoThis is absolutely a valid use for credit cards if you're careful and disciplined, but it can only stretch you for a maximum of one month before you've got to start making payments. What about when you're out of a job for six months? You've gotta have an emergency fund.
- ryangittins 10y agoFair point; this stuff certainly doesn't happen in a vacuum. I should have mentioned that investing comes with the caveat that one should also have a plan for major life events like a job loss. Having 6+ months of living expenses on hand in cash is a must. I firmly believe that 70%+ of the stress and anxiety of losing one's job is the pressing need for cash flow. I can't imagine the kind of stress that produces for someone who lives paycheck to paycheck. That brings me to a larger (slightly off-topic) point: people don't save enough money. 10% is the absolutely minimum one should be saving, despite that being the common advice which no one follows. Most people, even high-earners, spend nearly all of their money. There are tons of people out there making $75k+ per year who are a couple paychecks from being on the street. Those people are simply doing it wrong and will absolutely get bit in a down market. For those still reading, do this: Get an emergency fund that you can live on for 6+ months. Pay off your debts. Contribute to your IRA, 401k, or whatever else, putting all of that money into a boring index fund that tracks the market (I like VTSAX because Vanguard's fees are incredibly low). Make sure at least 20% of your money is invested. The only people who this might not work for are those earning at or near minimum wage with dependents. If you're not in that group, just do it. You do not need that 20% of your money right now. You may think you do, but you don't. You're spending money on stuff you don't need. My apologies for getting so far off topic. This is just something I feel very passionately about.
- JamilD 10y agoI was at the Berkshire meeting this past weekend, and Buffett gave a nice (if simplified) explanation of investing in index funds over active investment, as it pertains to hedge funds, hiring analysts, etc. An excerpt from the transcript [0] follows: What I’d like you to do is for a moment, imagine that in this room, you people own all of America. All the stocks in America are owned by this group. You are the Berkshire 18,000 (or whatever it is) that have somehow managed to accumulate all the wealth in the country. Let’s assume we just divide it down the middle. On one side, we put half the people…half of all the investment capital in the world, and that capital is what a certain presidential candidate might call ‘low energy’. In fact, they have no energy at all. They buy half of everything that exists in the investment world – 50 percent – everyone on this side. Now half of it is owned by these ‘low energy’ people. They don’t look at stock prices. They don’t turn on business channels. They don’t read the Wall Street Journal. They don’t do anything. They are a slovenly group that just sits for year after year, owning half of America’s business. What’s the result going to be? The result is going to be exactly average as all American business does because they own half of all of it. They have no expenses – nothing. What’s going to happen with the other half? The other half are what we call the ‘hyperactives’. The hyperactives’ gross result is also going to be half, right? The whole has to be the sum of the parts. This group, by definition, can’t change from its half of the ultimate investment results. This half is going to have the same gross results. They’re going to have the same results as the ‘no energy’ people but they’re also going to have terrific expenses because they’re all going to be moving around, hiring hedge funds, hiring consultants, and paying lots of commissions, et cetera. As a group, that half has to do worse than this half does. The people who don’t do anything have to do better than the people that are trying to do better. It’s simple. [0] https://www.biznews.com/global-investing/2016/05/02/berkshire-agm-transcribed-buffett-rips-into-active-fund-managers/ https://www.biznews.com/global-investing/2016/05/02/berkshir...
- IanCal 10y agoThis can cause an interesting dilemma if you assume that what people invest in makes a difference to the output. It may make more sense selfishly to be in the low-energy group, but the overall returns might be lower the more people go that route. A flawed car analogy: A driver and passenger will both travel the same distance, but the driver spends a lot more effort per mile. So it might both be better for each individual to be low-energy yet better for everyone if people were more active. It's an interestingly complex problem.
- matt_wulfeck 10y agoI love passive investing (vanguard admiral shares anyone??) but there are several things that I find lacking: 1. It's really boring. There's no earnings to follow, no products to watch, etc 2. You can't get rich from most indexes. The risk and reward is too low. It's unlikely to invest in a index that gives you a 10x return, though it does happen. In the end I keep the bulk in a low fee composite index but I like to speculate with a little, even if I invariably lose money on the spec part. It's more fun.
- nfriedly 10y agoI'd argue that you can get rich, just slowly.
- bonniemuffin 10y agoIf you want "fun investing", go to Vegas. I personally don't think of investing as a source of entertainment.
- matt_wulfeck 10y agoI quite enjoy listening to the conference call for a company. It really does tell you a lot about what's happening behind the scenes, and before anyone else knows it. It's like the company telling you little secrets :-)
- savanaly 10y agoInvesting in specific companies rather than indexes (which I assume is what everyone means by "fun investing"?) isn't very much like gambling in Vegas. With gambling in vegas you have a negative expected return with a high variance. With stock picking you have a positive expected return with a high variance (where do index funds fit in? positive expected return with low-ish variance). Although picking stocks is still not rational if your only concern is your long run wealth, it's not irrational for the same reason as gambling. It's bad because you have the same expected return as low cost index funds, and you exert effort or pay fees for the privilege. That doesn't mean I look down on everyone who actively invests though-- they may have good reason to think they are special and can pick stocks better than average or they may just enjoy it, as the person to whom you responded said he did. And then it would be rational to actively invest at least some of the time.
- aakilfernandes 10y agoThe main problem I have with index funds is the otherwise financially savyy people who tell me that index funds will get you on average x% a year. No! Index funds, in the past, gave x% a year. However past performance is not a predictor of future performance. There is no law of physics/economics that says the S&P500 has to rise at x% a year on average.
- lintiness 10y agoon top of that, the entire argument is predicated on us stock returns over a 100-150 year time period (an unusual one at that). what's the real expected investment life of the audience? the sample is ridiculously small.
- tanderson92 10y agoIt sounds like your problem may be forming your opinion of index funds based on the comments of people who are not financially savvy. Extrapolating an opinion about people who you admit are not financially savvy to the question of whether the financial products themselves are a good investment doesn't make too much sense to me.
- mac01021 10y agoPast performance should be a predictor of future performance if the forces driving the market remain similar to the forces driving it in the past. If they are not the same, then past performance may be a very bad predictor. But even in that case it is hard to imagine I'd do better by picking individual stocks unless I start researching companies as a full-time job.
- shostack 10y agoHere's what I haven't found a good answer to yet... What is the risk when a large percentage of the middle class and others are all in low fee index funds? This seems on the surface to be ripe for exploitation in some way, or like we'd be all exposed to the same black swan event and thus potentially trigger another major market event simply because everyone is in the same funds. I am not a super educated investor so if this is impossible due to the nature of indexes please correct me, but I can't help but feel that this push towards the Bogleheads approach may have the unintended side effect of proverbially putting "all of our investors in one basket." What are the risks if main street investors truly do shift to this style of investing en masse? It seems that the investments of our middle class and upper middle class would all take big hits at the same time which could cripple the nation moreso than if people were in other investments. Again, I'm probably missing something here so would appreciate being educated on why my fears are invalid. I haven't been able to find any info on this from googling.
- JamilD 10y agoIndex funds expose you to essentially the entire market; it's the sum of thousands of tiny pieces of businesses all across America. We're not putting all our eggs in one basket, rather, we're all distributing them across many. If you can pick an investment that will weather an economic downturn, and still provide a decent return — let me know, because I want to get in on it ;)
- jerryhuang100 10y ago“Yes, you need to diversify... mix your more established growth names–e.g., your Microsofts, your Intels, your Ciscos, your Yahoos, basically, the reliable blue chip stuff–with higher-risk bets–something like an Astroturf.com, or an Iomega, or a JDS Uniphase, that will offer high-powered upside if things work out for those companies. That will give your portfolio balance, without sacrificing growth." It's really a joke for this portfolio from some TV gurus from that time around '99, as every "blue chip" companies on the list mostly worth significant lower in '16 from their '99-00 heights: >-50%+ INTC, CSCO, YHOO (not to mentions it's on the selling block). Maybe MSFT is an exception. Those high-risk bets? more like busts: astroturf (?, never heard of it), IOM (from $100 to $3.56 when acq'd by EMC), JDSU (from ~$300 to $6 as VIAV and $25 as LITE). I really do not see what growth in such portfolio. This just reminds me the moment that Jim Cramer and other pundits on TV urging investors to buy and hold Lehman Brothers stocks before its fall in '08 "because it's too big to fail".
- miseg 10y agoDealing with retirement investment policicies offered in Ireland, I see two sides: 1. Actively managed funds diversified across equitieis, bonds, cash, etc 2. Index funds for specific indices, such as "top 4,000 US companies" The danger with 2, they say, is you're not diversified. That'll be up to me I suppose to try to diversity into other areas.
- baus 10y agoMaybe that is a function of your market, but indexing doesn't prevent you from becoming diversified.
- arielweisberg 10y agoMost popular index funds are very diversified. 4000 companies not diversified enough for you? There is research that suggests any 50 companies picked at random will give you quite a bit of diversification. The real lack of diversity is that it's weighted towards US companies which some people have decided they want and others don't, and apparently it's weighted towards stocks as an asset class as well. I don't think weighting is the same as lacking diversification, although certainly you are lacking one kind of diversification.
- iofj 10y agoI would think that generally one means different things. Specifically, a diversified portfolio would hold stocks and bonds. Or, if one is of the "stocks don't go up over the long term" persuasion, it means stocks + shorts (for a net market neutral portfolio) and bonds. So no, popular index funds are not diversified. There are exceptions, of course.
- hrez 10y agoWhat they mean is that it's all in highly correlated assets. It lacks diversification across non-correlated asset classes. Stocks (US and emergent), bonds and cash are less correlated than US companies even 4000 of them.
- nxzero 10y agoImpact is nothing. Whole point of indexed funds is match the market. If you feel that as an investor you're able to beat the market, which includes indexed funds, good luck. "Fool and their money are soon parted."
- deleted 10y ago[deleted]
- pbreit 10y agoThe distinction between passive and active management is kind of a misnomer anyway, right? There's no reason an "active" manager can't just select x00 companies by some criteria, publish that list and then just invest in that basket with modest adjustments? At this point, the primary advantage that "passive" management has is extraordinary marketing, mainly through the selection of S&P 500 components.
- known 10y agoGold gave better returns in last 10 years http://www.nsegold.com/why-invest-in-gold.php http://www.nsegold.com/why-invest-in-gold.php