Death of index investing?

[ER_Hopeful]

just came across this posting in earlyretirementextrem.com. any thoughts?

http://earlyretirementextreme.com/2008/10/the-death-of-index-investing.html

quote:
Today the S&P500 continued its downward trajectory. If you had bought index funds 10 years ago or 5 years ago, you would have gotten exactly nowhere(*). In October 1998, 10 years ago, the S&P 500 traded around 995. In September 2003, 5 years ago, the S&P 500 also traded around 995. In between those dates, the index generally traded higher. This means that if you have relied on dollar cost averaging over the past five or ten years like a herd of experts recommend, you would have lost money, because the current price is below the average price. Dollar cost averaging only works insofar the the final price is higher than the average price and not surprisingly, most proponents of dollar cost averaging finishes the the example on a high price, not a low price. In reality dollar cost averaging cuts both ways and it only works to average out volatility. So much for that theory.

[moderator edit - copyright concerns. Follow the link at the top for the full article.]


end quote

 

[ziggy29]

This is said any time the market is flat or negative. You almost never hear from these people in a bull market.

 

[Urchina]

A couple of thoughts (from someone who's still pretty far down the learning curve):

1. He does say that indexing works well over the long run. No index investing book I've read has ever advocated index investing for short-term profit.

2. He says putting money into good stocks is better than putting money into bad stocks. Well, duh. So tell me, how does the average investor decide what's "good" and what's "bad" with certainty?

3. He invests for dividends. That's great. Lots of people do that. That's not the focus of indexing (at least as far as I can tell).

Basically, it sounds like he has an alternative investing program. He's looking for dividends from solid stocks, and that's what he invests in. He thinks this method is better than indexing, and for him it probably is.

But that doesn't mean indexing is dead.

 

[RetiredGypsy]

The Rolling Stones have been around since indexing began and look how popular they still are.

 

[ziggy29]

3. He invests for dividends. That's great. Lots of people do that. That's not the focus of indexing (at least as far as I can tell)

There are dividend indexes out there. In addition, most indexes built with a "value" tilt tend to have more emphasis on dividends.

The problem with dividend indexes recently (such as the exchange-traded DVY) is that they are very heavy on financials. Ouch.

 

[FinanceDude]

There are dividend indexes out there. In addition, most indexes built with a "value" tilt tend to have more emphasis on dividends.

The problem with dividend indexes recently (such as the exchange-traded DVY) is that they are very heavy on financials. Ouch.

Index investors revel in good markets, and are quite silent in bear markets......

 

[Marquette]

Index investors revel in good markets, and are quite silent in bear markets......

To be fair, I haven't heard a lot about any mutual funds.... looking at the YTD results on American Funds site, I can see why all camps might be a little quiet right now.

 

[ziggy29]

To be fair, I haven't heard a lot about any mutual funds.... looking at the YTD results on American Funds site, I can see why all camps might be a little quiet right now.

Not only that, but I felt pretty good as an asset allocator in 2000-2002.

A lot of asset classes worked in 2000-2002. Small caps, REITs, emerging markets, a smattering of gold mining funds...all did well.

I lost less in 2000-2002 on a percentage basis than I have in the last two weeks.

 

[Marquette]

Not only that, but I felt pretty good as an asset allocator in 2000-2002.

I hear you, and I feel for you (although I was happy with filling up at $2.99 a gallon, I'm sorry for your loss). I have a mix of indexes and managed funds. Everything is down. Bond are down, international is down, small cap is hurting, large value is hurting... doesn't matter who has my money, I have less of it.

 

[FinanceDude]

To be fair, I haven't heard a lot about any mutual funds.... looking at the YTD results on American Funds site, I can see why all camps might be a little quiet right now.

Is the Vanguard site any better? Maybe the Fidelity site has better news. Or maybe, other than Warren Buffett, we are all down........

 

[Marquette]

Is the Vanguard site any better? Maybe the Fidelity site has better news. Or maybe, other than Warren Buffett, we are all down........

I can see why all camps might be a little quiet right now

 

[ziggy29]

To be fair, I haven't heard a lot about any mutual funds.... looking at the YTD results on American Funds site, I can see why all camps might be a little quiet right now.

From my Fidelity 401K site a few minutes ago (as of last night)...

 

[Gworker]

This means that if you have relied on dollar cost averaging over the past five or ten years like a herd of experts recommend, you would have lost money...

I have an inherited IRA that is invested in funds with high fees that are not indexed through a financial advisor.

They have lost a ton of money. One fund is down 41%.

So based on that article maybe it should read, "The end of investing."

I could write an article that says you shouldn't invest, if you had all your money in a savings account you wouldn't have lost any money this year.

 

[donheff]

I'm still holding a handful of carefully chosen mutual funds from my FA. They are not doing any better than my index funds and in a few cases much worse.

In a massive downturn there is no where to hide unless you are a [-]successful[/-] lucky market timer and go all cash at the right point .

 

[cute fuzzy bunny]

Index investors revel in good markets, and are quite silent in bear markets......

Non index equity fund managers are pretty quiet in bear markets, since their funds generally do about the same or worse than indexes.

But they like those deep dives so that they can heavily advertise the one or two funds in their portfolio that stayed a little bit ahead of their respective indexes, while quietly killing off the ones that flew face first into the ground.

 

[ziggy29]

So based on that article maybe it should read, "The end of investing."

I'm thinking it's time for a "Death Of Equities" headline.

Maybe Cramer's piece today is close enough:

Mainstreet : Money : Retirement Planning : Cramer: Will We Regret The 401K Boom?

 

[madsquopper]

The quote in the first post of the thread is a bit simplistic and doesn't address asset allocation. A trivial example using Fidelity's 4 index funds: At the start of 1999, buy equal values of their large cap, extended market, foreign stock, and bond index funds. Rebalance at the start of each year to keep a 25/25/25/25 allocation. From the start of 1999 to date, the annualized CAGR is a bit under 3%. Not great, but at least not zero.

Larry

 

[unclemick]

Non index equity fund managers are pretty quiet in bear markets, since their funds generally do about the same or worse than indexes.

But they like those deep dives so that they can heavily advertise the one or two funds in their portfolio that stayed a little bit ahead of their respective indexes, while quietly killing off the ones that flew face first into the ground.

Don't know about this guy - but my Norwegian widow stocks as measured in my VG broker account are running about -3% more than my Target Retirement(with a 35% fixed weight even). The spread seems to be holding about hand grenade steady though this long downdraft.

So I'm with the dividends as a warm spot - but his conclusion sucks.

85% balanced index and a few, 15% dividend stocks - a tad north of 3% yield and climbing. Party on.

And the list - due to mergers/spin offs/going out of business - etc has not stayed static since 1989.

When the Norwegian blows the doors off an index - I do something totally silly - like rite a BOOK! - with her picture on the cover.

heh heh heh - don't hold your breath.

 

[Notmuchlonger]

From my Fidelity 401K site a few minutes ago (as of last night)...

Made me check . -33.8 %

 

[Retire Soon]

This is a Morningstar interview of Jack Bogle on index investing:

Morningstar Video