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Article saying, "Indexing: "the worst way to invest, except for all the others"
Old 12-17-2013, 10:54 AM   #1
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Article saying, "Indexing: "the worst way to invest, except for all the others"

There was an article on yahoo finance today:
entitled, "Indexing: "the worst way to invest, except for all the others"". Says that the big flaw in index investing, is that it does not solve for human nature. Then goes on to say, "With more than $3 trillion of assets in index funds, it's clear investors have learned the lesson that indexing is the best long-term solution for individual investors. The point here is that indexing isn't the only thing that matters and there are many lessons investors have yet to learn."

I am not quite sure what the article is trying to say. I believe that most folks on FIRE believe index funds are the way to go. I am doing mostly Index funds.

Any comments?


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Old 12-17-2013, 12:02 PM   #2
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My reading is that people will still time the market by moving funds from one type of index fund to another.

For example, the huge flows into bond and gold funds in reaction to the 2008 crisis -- and flows out of equity funds -- demonstrate that retail investors continue to "chase" performance and let emotions drive investing decisions. They also serve as reminders of the benefits of diversification; many investors burned by the 2008 debacle in equities rushed to the perceived "safety" of bonds and gold, only to miss out on the historic rebound in stocks. Many of those investors are now realizing that you can lose with bonds and precious metals -- as with any asset class.

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Old 12-17-2013, 12:56 PM   #3
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As primarily an index investor, what I take from the article is revealed in this:

"...whereas for a professional underperforming an index equals 'career risk' and possible loss of livelihood."

Under-performing the index is death for an active manager. And the only way they have a chance of beating it is with more risk. Take the risk, roll the dice, and if you win, you get promoted, increase your income, and get more money to play with. If you under-perform or match the index, you loose either way. So there is a big incentive for them to gamble. The problem for the investor is that they are rolling the dice and gambling with your money.
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Old 12-17-2013, 01:17 PM   #4
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The only type of investor who has a decent chance to beat the broad indices is the true value investor.

Everybody else should use index funds.
AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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