How can I get my mother to get to minimally understand the advantages of index investing?

Question

She has a very long investing horizon (several decades according to actuarial life table), so index investing would be perfect for her. I'd like her to read "Little Book of Common Sense Investing" and ditch all of her actively managed funds in favor of wide market indices.

I know she won't be able to grasp much of it and, to be fair, it seems completely inconceivable, beyond belief, that the most investing theory is completely useless (CAPM, Efficient Market Hypothesis, Beta, etc). Who would readily believe that these professionals talk so much nonsense?

All she knows is that her late husband did well fund investing. He was patient, that's true. But every patient investor would have been successful in the last few decades.

At least she has the common sense not to do any trading, also following the advice of my father.

I bought her the book, I know she won't read it, I know if she reads it she won't understand it, if she understand something I doubt she will rebalance her portfolio accordingly.

Should I give up? I think it's hopeless but at the same time it's a small fortune what I would be saving her, so I'm obliged to try my best.

For bonus points, what I really would like her to do is to park her money until the market cools down. She has drilled into her head that the market always goes up, that she would have to pay taxes and that inflation would eat at her money (failing to realize that she will have a negative return for the next years anyway).

Answer 1

The bottom line is that you are a caring son that wants to see his mom do well. However, it sounds like you are more of a numbers guy then she could ever be, and she is probably a stereotypical mom that cares about her children and is far more adverse to risk. The risk aversion is compounded by age and from what it sounds like not being involved in the family investment decisions.

This is far more of a interpersonal type question and I ask you to view it from that perspective. My own wife is a very savvy business person, negotiator, and quite smart. However, she still leaves all the investing decisions to me. I can see her, after I pass, "to keep things like Pete had them". I don't see this relationship as uncommon, and it is quite efficient. We do (and your parents probably did) things that are separate but supportive of one another.

I agree with your investment perspective but her's is much different. In the case she is wrong about investing, and drastically loses a bunch of savings there is not much opportunity to earn it back by working two jobs, or allowing time to take its course. You on the other hand do have that opportunity. Also there is not much to be gained, by her, for a handful of extra basis points. Her investment horizon is shorter than yours. You, on the other hand, those basis points will translate to real money.

For my own life, my mom leases cars. She has the cash to buy them outright, and it used to drive me crazy that she did so. To compound her loss when leasing, she normally turned them in way under miles. It used to drive me crazy! However, I had to let it go and I am glad I did.

For one, it is her money, she gets to do with it as she pleases.

Secondly, she likes to drive a new car every three years. Okay, again, if that is how she wants to spend her money, fine.

Third, it gives her something to do. She can take the car to the dealership for her free oil change and visit with the other seniors as the dealer takes an inordinate amount of time for 10 mins worth of work.

Lastly, taking money out of her savings to purchase a 20K car sets alarm bells off in her risk meter. This does not happen when she takes her pension money and makes a $350 payment per month. Logical arguments aside, it is her risk meter that is being triggered, not yours or mine.

There is one other factor that is worth mentioning. That woman used to change your diaper, has seen you at your most compromising moments, and was directly responsible for your survival for a large portion of your life so far. She is going to take financial advice from you? No way. She'll take it from your buddy who grew up in the next town that is the same age, but not you.

So likely it is a lost cause. However, if you have any hope of making a change it will be relationship based not numbers based. I would concentrate on having a good relationship with her and only bring up finances if she chooses to do so.

Answer 2

There are no sure bets in the marketplace, even with investing in index funds. Some people are more conservative than others. Perhaps they don't think the growth of index funds is sustainable for reasons they intuit but don't want or can't explain to you. If you have some special insight or insider knowledge about the long term value of the stock market, please post it. Most of the enthusiasm is based on population growth and endless free oil -- neither sustainable. Know that every model of unmanaged, exponential growth ends in catastrophic collapse.

If their reservations are due to concerns about the future, CDs and a good savings account may be their best bet. They are FDIC insured against market failures (but not against social collapse).

Answer 3

The advantages of index funds is that the investor will be up when the index news is up and the investor will be down when the index news is down. Everyone is at the same party.

There is something more and it's the fact that the double tops of the years 2000 and 2007 could represent the effects of index re-balancing, for instance, as moving from the year 2000 to the year 2007. However, the top of the year 2018 probably represents government support of the financial markets. Then since the government support is un-winding, the current amount of effective index re-balancing is questionable.

Diversified funds, other than index funds, might fail to match the result of index funds because of holding investment bank positions that the investment banks are stuck with. But certainly, there have been some diversified funds, other than index funds, with enormously good reputations.

Un-diversified funds do have the potential to outperform index funds but there is also higher risk. But where is the risk with a portfolio of 25 stocks or less where every stock is consistently meeting or exceeding earnings expectations ? This is a suggestion of a stock picker's market but the counterpoint is how good is the stock picker ?

Bond funds can outperform the stock market over short periods of time. That is assuming the ultimate success of the diversified stock market.

There is another type of stock fund and it's a diversified fund with every position the same size. This type of fund is more like investing in potential while a capitalized-weighted index fund is more like investing in the big momentum trends.

Or "value investing" could represent positions at low P/E ratios or could alternatively represent positions that are just currently out-of-favor. A capitalized-weighted index fund on the other hand and again, reduces positions that are out-of-favor and increases positions that are in favor and is a type of momentum fund.

I don't exactly know where to place companies that are funded and that are working their potential but not yet profitable. I suppose they just show-up in small-cap and mid-cap funds.