Comments on: Debunking “Why Index Investing May Not Be for You”

By: Returns Reaper

Returns Reaper — Fri, 12 Sep 2008 13:23:44 +0000

Dave, that’s an excellent point when you mention that the reason many people enjoy researching stocks and attempting to time the market is because they believe they can beat the market.

I used to be that way. But after reading books like Bernstein’s ‘Four Pillars of Investing’, Malkiel’s ‘Random Walk Down Wall Street’, and Swensons ‘Unconventional Success’, I became convinced that this was the wrong approach.

After becoming an indexer, I found a lot of the stock research and business news headlines that used to be so riveting had lost much of their appeal. I still keep track of what’s going on at a macro level as I can’t help but wonder what’s happening to my mortgage interest rate and the price of gas, but these things no longer influence my investing decisions.

By: Market Correction, Web Hosting and Weekend Reading - Sept 12, 2008 | Million Dollar Journey

Fri, 12 Sep 2008 10:31:17 +0000

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By: Dave

Dave — Mon, 08 Sep 2008 05:20:42 +0000

Ben333, you are right, the S&P500 is not quite the entire market, however, Vanguard’s Total Stock Market Index is (pretty much). I only mentioned the S&P500 because Maddy was referring to it.

With the more specialized ETFs that you refer to (sector ETFs) one must be careful of the higher MERs often associated with those ETFs.

Are you saying that the more volatile the market is, the more one can profit from good asset allocation? Good point. There is definitely way more of a rebalancing bonus the more volatile stocks are bonds are, relative to each other.

By: Ben333

Ben333 — Sun, 07 Sep 2008 23:44:41 +0000

The statements about indexing providing only average performance a bit misleading. For instance, the S&P 500 has had years wherein it is an above average performer. Also, if average annual returns are 13-14%, on an absolute basis, that is pretty good when taking into account the effect of compounding. In other words, $100,000. left to reinvest for 10 years grows to $404,000.
Another thing to consider, there are now so many ETF’s that track many different market sectors, asset classes and economic sectors (both long & short, some with considerable leverage. Ultra-Pro) that the potential to significantly out-perform the market through asset allocation is simply amazing.
This is compared to “back in the day” (from which most market history is derived) investing in single stocks as an alternative.
Of course, one must now fear company specific risk and events (Fannie, Freddie) v. market volatility.
The “average” investor earning “average” returns can profit substantially and control the level of market related risk he wishes to take and may profit from either the long or short side of a market.
This will hold so long as market volatility in the extremes we have witnessed in recent years holds. If volatility eases for a prolonged period, single stock investing may again win out. Time will tell.

By: Dave

Dave — Sun, 07 Sep 2008 07:07:06 +0000

Maddy, most people consider it a given that stock markets go up over time, at least as long as our economies grow.

Currently 16% of the S&P 500 is made up of information technology stocks, the largest holdings being Microsoft, IBM, and Apple. I wouldn’t say that 16% tech makes it tech-heavy. As I said, you can’t forecast the markets so why pick and choose sectors to invest in? Of course if someone switched $100,000 from cash or bonds or financial stocks into the S&P500 or the Nasdaq in the year 2000, they would have suffered quite a bit in the years following.

This is no different then buying a house at the peak of a bubble or switching from renting to owning a house during the peak of a bubble; however, those who have been invested in the S&P500 for a long time, or the housing market for a long time, don’t notice the bubble. The large decline in value just offsets the large gain in value. The only people that were affected by the housing bubble were those that bought or sold during a certain period and the only ones that suffered during the bubble were those that bought or sold tech stocks during that period.

It’s a fact of life I guess. Personally, I will probably never notice anything like the tech bubble, going forward. My asset allocation is fixed and I am continually putting money into the market at a fairly constant rate.

By: Maddy Nohiba

Maddy Nohiba — Sun, 07 Sep 2008 03:28:53 +0000

I’m a little confused. First you say, “to forecast when the market is going to down. No one has been able to achieve this yet (and no one every will).” Then a few sentences later you say, “the stock market goes up over time.”

In the late ’90s there was a dot-com boom. Since the S&P500 is tech-heavy, index funds tracking in the S&P500 went up and then crashed. With index funds you don’t control whether you want tech stocks in your holdings or not. You are just given it because indexing essentially is just following the herd.

By: This and That # 108

This and That # 108 — Fri, 05 Sep 2008 00:42:24 +0000

[...] Investing Intelligently debunks the reasons indexing may not be for you. [...]

By: Canadian Capitalist

Canadian Capitalist — Thu, 04 Sep 2008 11:33:02 +0000

Thanks for the mention. Individual investors are no better at timing either. Rob Carrick writes today that as markets were falling, investors were piling onto money market funds. Downside protection is provided by adding bonds — not superior stock selection or market timing.