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I've always been a believer in index funds, and lately have been reading books such as The Coffee House Investor and The Lazy Person's Guide to Investing. It all makes sense to me except that the S&P has been not such a great investment over the past ten years. I have a good 30 years to invest. Is the current state of affairs an expected blip in this kind of plan, or do I need to consider different strategies to grow my money?

  • Different strategies like something other than stocks, or different strategies like other kinds of stock funds? – Eric Petroelje Aug 5 '10 at 16:41
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    it depends how you define "dead". More about Boglehedian Investing here: area51.stackexchange.com/proposals/29113/bogleheadian-investing. – user1770 Feb 9 '11 at 2:01
  • perhaps a boglehead would ask "do you want to become dead?" It is unbelievable how much private investors lose in trading, more with [1], or how much they trade -- turnovers skyrocketed presently, was it 3000% with ETFs? [1] papers.ssrn.com/sol3/papers.cfm?abstract_id=529062 – user1770 Feb 9 '11 at 2:05
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    If you have a good 30 years to invest, maybe you ought to glance at the S&P returns for the past 30 years. – fideli Feb 9 '11 at 4:48
  • If you believe in indexing, why would you use just the S & P instead of the total market? – JB King Jan 14 '14 at 4:35
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"The reports of my death have been greatly exaggerated." - Twain

I use index funds in my retirement planning, but don't stick to just S&P 500 index funds.

Suppose I balance my money 50/50 between Small Cap and Large Cap and say I have $10,000. I'd buy $5,000 of an S&P Index fund and $5,000 of a Russell 2000 index fund.

Now, fast forward a year. Suppose the S&P Index fund has $4900 and the Russell Index fund has $5200. Sell $150 of Russell Index Fund and buy $150 of S&P 500 Index funds to balance. Repeat that activity every 12-18 months. This lets you be hands off (index fund-style) on your investment choices but still take advantage of great markets.

This way, I can still rebalance to sell high and buy low, but I'm not stressing about an individual stock or mutual fund choice.

You can repeat this model with more categories, I chose two for the simplicity of explaining.

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    Just curious, if both the Russell and the S&P were down each by 5% after 6 months, what strategy would you follow? – Victor123 Jan 14 '14 at 1:37
  • Diversify across fund types. Rebalance when you drift too far away from your intended mix. Remember that you have a plan and have a long-tem goal, and don't stress about the short-term stuff -- you could even view a drop as a chsnce to buy at a lower price. – keshlam Dec 2 '15 at 18:59
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If the ship is sinking, switching cabins with your neighbor isn't necessarily a good survival strategy. Index funds have sucked, because frankly just about everything has sucked lately.

I still think it is a viable long term strategy as long as you are doing some dollar cost averaging.

You can't think about long term investing as a steady climb up a hill, markets are erratic, but over long periods of time trend upwards. Now is your chance to get in near the ground floor.

I can completely empathize that it is painful right now, but I am a believer in market efficiency and that over the long haul smart money is just more expensive (in terms of fees) than set-it-and-forget it diversified investments or target funds.

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    I'd add "and rebalancing" after "as long as you are doing some dollar cost averaging". – Chris W. Rea Aug 11 '10 at 18:54
  • If the ship is sinking, you head for the lifeboats -- not drown in your room. I'm not some financial wizard, and I've averaged a 9% return every year for the last decade by diversifying and changing strategies when circumstances warranted. – duffbeer703 Feb 10 '11 at 2:03
  • +1. The volatility of the stock market starts to look like a lot more reasonable a risk to accept when you realize that if you buy short treasuries you're almost guaranteed to lose in real terms (adjusted for inflation). – dsimcha Aug 31 '11 at 2:56
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It's incredibly difficult to beat the market, especially after you're paying out significant fees for managed funds. The Bogleheads have some good things going for them on their low cost Vanguard style funds. The biggest winners in the financial markets are the people collecting fees from churn or setting up the deals which take advantage of less sophisticated/connected players.

Buy, Hold and Forget has been shown as a loser as well in this recession. Diversifying and re-balancing however takes advantage of market swings by cashing out winners and buying beaten down stocks. If you take advantages of general market highs and lows (without worrying about strict timing) every few months to re-balance, you buy some protection from crashes in any given sector.

One common guideline is to use your age as the percentage of your holdings that are in cash equivalents, rather than stocks. At age 28, at least 28% of my account should be in bonds, real estate, commodities, etc. This should help guide your allocation and re-balancing strategy.

Finally, focusing on Growth and Income funds may give you a better shot at above S&P returns, but it's wise to hold a small percentage in the S&P 500 as well.

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    not just fees but for some reason it is not anymore enough to hold just 6, 15, 30 ... stocks, not those old good days with Graham, but the whole market. Diversification is becoming more and more important. More: kuznets.fas.harvard.edu/~campbell/papers/diversification.pdf – user1770 Feb 9 '11 at 1:58
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    "Real estate, commodities, etc" are not what I would consider "cash equivalents." They're just as risky (volatile) as stocks, but hopefully not correlated with stock returns. – Andrew Coleson Apr 10 '11 at 21:26
  • I agree hard assets aren't cash. Lots of "cash equivalent" bonds vanished in the crisis though. A mix of tangible assets hold intrinsic value as long as there is demand. The age based allocation scale is about preserving gains & having cash on hand at retirement. Given inflationary policies, buying hard assets when they are relatively cheap will do a better job of wealth retention than current low interest bonds. – SpecKK Jun 3 '11 at 20:31
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From http://blog.ometer.com/2008/03/27/index-funds/ ,

Lots of sensible advisers will tell you to buy index funds, but importantly, the advice is not simply "buy index funds." There are at least two other critical details: 1) asset allocation across multiple well-chosen indexes, maintained through regular rebalancing, and 2) dollar cost averaging (or, much-more-complex-but-probably-slightly-better, value averaging). The advice is not to take your single lump sum and buy and hold a cap-weighted index forever. The advice is an investment discipline which involves action over time, and an initial choice among indexes. An index-fund-based strategy is not completely passive, it involves some active risk control through rebalancing and averaging.

If you'd held a balanced portfolio over the last ten years and rebalanced, and even better if you'd dollar cost averaged, you'd have done fine. Your reaction to the last 10 years incidentally is why I don't believe an almost-all-stocks allocation makes sense for most people even if they're pretty young.

More detail in this answer: How would bonds fare if interest rates rose?

I think some index fund advocacy and books do people a disservice by focusing too much on the extra cost of active management and why index funds are a good deal. That point is true, but for most investors, asset allocation, rebalancing, and "autopilotness" of their setup are more important to outcome than the expense ratio.

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Dogma always disappoints.

The notion that an index fund is the end-all, be-all for investing because the expense ratios are low is a flawed one. I don't concern myself with cost as an independent factor -- I look for the best value.

Bogle's dogma lines up with his business, so you need to factor that in as well. Vendors of any product spend alot of time and money convincing you that unique attributes of their product are the most important thing in the world.

Pre-crash, the dogmatics among us were bleating about how Fixed-date Retirement Funds were the new paradigm. Where did they go?

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Excellent Question!

I agree with other repliers but there are some uneasy things with index funds. Since your view is death, I will take extremely pessimist view things that may cause it (very big may):

  1. tracking indices never stay the same, updating indices is costly to shareholders due to front running (extra cost due to abnormality)
  2. asymmetric information and insider information not good for indexers and the major markets -- easier to exploit in active funds or hedge funds with less restrictions?
  3. more abnormalities & extreme conditions events (Y more)

I know warnings about stock-picking but, in imperfect world, the above things tend to happen. But to be honest, they feel too much paranoia. Better to keep things simple with good diversification and rebalancing when people live in euphoria/death.

You may like Bogleheads.org.

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I think you can do better than the straight indexes.

For instance Vanguard's High Yield Tax Exempt Fund has made 4.19% over the past 5 years.

The S&P 500 Index has lost -2.25% in the same period.

I think good mutual funds will continue to outperform the markets because you have skilled managers taking care of your money. The index is just a bet on the whole market. That said, whatever you do, you should diversify.


List of Vanguard Funds

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    The example fund holds a lot of bonds from troubled states and communities which can still default if we stop bailing them out. personal.vanguard.com/us/… All investments have risk. Make sure to educate yourself. – SpecKK Aug 5 '10 at 18:03
  • Sorry, when you say continue to outperform, I don't understand. Funds have lagged indexes for most periods. Those skilled managers appear to add more cost than return. Of course in hindsight you'll see funds that beat, a handful out of thousands. – JoeTaxpayer Jan 8 '11 at 2:34
  • @JoeTaxpayer What fund over what period should I look at? You are right to point out that it's easy to see in hindsight what funds did well compared to the average, and hard to pick those out in the first place! – C. Ross Jan 10 '11 at 20:46
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    This seems to be a Texas sharpshooter fallacy - selecting post-factum data to prove that bonds are better than stock. In the hindsight, yes, for the last years, it is true. However it says absolutely nothing about what could happen for the next 5 years - and high yield bonds are high yield for a reason - they are risky. As the current crisis amply showed us, even AAA-graded debt is dangerous unless you can count on Feds to bail you out (which you can't unless you are a union or a large bank). Also, if you want to evaluate a bonds fund, you should compare it to a bonds index. – StasM Feb 9 '11 at 3:44
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    I don't think comparing trailing returns on two funds in different asset classes means anything whatsoever, honestly. – Havoc P Apr 24 '11 at 14:43
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One alternative to bogleheadism is the permanent portfolio concept (do NOT buy the mutual fund behind this idea as you can easily obtain access to a low cost money market fund, stock index fund, and bond fund and significantly reduce the overall cost). It doesn't have the huge booms that stock plans do, but it also doesn't have the crushing blows either. One thing some advisers mention is success is more about what you can stick to than what "traditionally" makes sense, as you may not be able to stick to what traditionally makes sense (all people differ).

This is an excellent pro and con critique of the permanent portfolio (read the whole thing) that does highlight some of the concerns with it, especially the big one: how well will it do in a world of high interest rates? Assuming we ever see a world of high interest rates, it may not provide a great return.

The authors make the assumption that interest rates will be rising in the future, thus the permanent portfolio is riskier than a traditional 60/40. As we're seeing in Europe, I think we're headed for a world of negative interest rates - something in the past most advisers have thought was very unlikely. I don't know if we'll see interest rates above 6% in my lifetime and if I live as long as my father, that's a good 60+ years ahead.

(I realize people will think this is crazy to write, but consider that people are willing to pay governments money to hold their cash - that's how crazy our world is and I don't see this changing.)

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