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Index investing isn't predicated on 10% returns nor was it ever a guarantee of such returns. Index investing is simply the theory that the markets are efficient

Index investing isn't predicated on 10% returns nor was it ever a guarantee of such returns. Index investing is simply the theory that the markets are efficient and reflect all possible information on a security and that you're not smarter than the market. Think of it this way-- buying a stock is a way of saying "the market is wrong, I think $COMPANY is worth more than the price at which it is trading". Unless you have information which the market does not (the next Apple product will be a flop, etc) this becomes, by definition, a speculative position. Index investing is a way of opting out of the highs and lows of stock picking and still take part in the general growth in a market/sector/<whatever the index cover>. The story merely points out that for some timespans, the growth of the US markets was crap and that (unsurprisingly when you think about it for a second) returns have varied substantially over the past 50 years even for long time-spans. TLDR; if you think the US economy will keep growing and don't think you're smarter than marketɫ, index investing is probably still a really good way to go. ɫ hot tip: you're not

borism 16y ago
this is a good point on efficiency of the market, however it is not correct conclusion that you cannot find companies in that market that are not better performers than others - obviously there are companies in S&P500 or any other index that perform better than others for any given period of time. But if you focus on particular set of companies (tech for example) your risk increases since your diversification decreases. Given your own example, obviously AAPL outperformed market for the past decade. Whether someone could have predicted that is a different question though.
maigret 16y ago
Yes... Told differently, index fund is great because basically their cost difference with a managed fund are similar to the difference in return. Take a managed fund costing 0,5% a y more than the index fund, the managed one will have to do .5% better, which is not always the case. Take on top of that the very high fee for buying managed funds (up to 5%), and index funds suddenly gets interesting, especially if you want to invest for a few years only. Compared to single stocks, index funds can be more expensive but they offer some more reliability as the diversification is higher (at least for small investors)
6ren 16y ago
Caveat: Market prices are largely driven by huge pension funds and other institutional funds. These are judged by their customers on their annual or even quarterly returns. Therefore, given a choice between long-term and short-term returns, their managers are compelled to choose the former. Thus, stocks with great long-term returns but poor short-term returns will not be correctly priced by the market - even if it's obvious from well-known information. An example is when a stock is hit by publicized litigation, that will drain some cash, but not impact their core business. Not only does it look bad, but it will negatively impact their hard numbers... in the short-term.

borism 16y ago

this is a good point on efficiency of the market, however it is not correct conclusion that you cannot find companies in that market that are not better performers than others - obviously there are companies in S&P500 or any other index that perform better than others for any given period of time. But if you focus on particular set of companies (tech for example) your risk increases since your diversification decreases. Given your own example, obviously AAPL outperformed market for the past decade. Whether someone could have predicted that is a different question though.

maigret 16y ago

Yes... Told differently, index fund is great because basically their cost difference with a managed fund are similar to the difference in return. Take a managed fund costing 0,5% a y more than the index fund, the managed one will have to do .5% better, which is not always the case. Take on top of that the very high fee for buying managed funds (up to 5%), and index funds suddenly gets interesting, especially if you want to invest for a few years only. Compared to single stocks, index funds can be more expensive but they offer some more reliability as the diversification is higher (at least for small investors)

6ren 16y ago

Caveat: Market prices are largely driven by huge pension funds and other institutional funds. These are judged by their customers on their annual or even quarterly returns. Therefore, given a choice between long-term and short-term returns, their managers are compelled to choose the former. Thus, stocks with great long-term returns but poor short-term returns will not be correctly priced by the market - even if it's obvious from well-known information. An example is when a stock is hit by publicized litigation, that will drain some cash, but not impact their core business. Not only does it look bad, but it will negatively impact their hard numbers... in the short-term.