What are the arguments against index investing?

ironchef said:
However, in real life, few individuals invest by putting everything in all at once and then wait 20 year till retirement to spend it. Most put a small fix amount of money in their 401K or IRA monthly, if you run a 20 year running window analysis, such an investment scheme should do well after 20 years. It is true dollar cost averaging.
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Exactly. Investors who did dollar cost average during any financial crisis (even during US depression or Japanese bubble) would have come out ahead provided they had diversified asset allocation.

It is asset allocation and cost that matters and of which investor's have direct control over
 
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smili said:
One of the best arguments imho is that there is really only one index - a single global, whole world, cap weighted index. Any deviation from that is necessarily an "active" choice as to allocation. So to the degree that we deviate from that global index, we are all "active" investors.
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Agree. Only reason against this argument is that it neglects tax loss harvesting. If the same world index (VT) is split into similar weights VTI,EFA, VWO there are lot more possibility of tax loss harvesting
 
Visaria said:
This is untrue. There have been a number of long periods 20 years or more where a major index has gone nowhere or even gone down. The dow, sp500, Germany dax, Japanese nikkei (that one's still on going since it went to about 40k in 1989, and after 30 years it's about half that!). It will be a good lesson for you to look carefully at very long term charts of the major indices to verify what I'm saying.
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Dow and Nikkei is flawed index (price weighted, not cap weighted). Even considering that diversified Japanese investor would have come out ahead in 20 years.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=23036&start=100
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For S&P there were no 20 year period when total return was less than zero.
http://www.crsp.com/files/investments_illustrated/BP_h_2015_crsp_us-en.pdf
 
"Triumph of the Optimists" by Dimson, Marsh et al is wonderful book for financial history.

For limited time, its close cousin "Financial Market History: Reflections on the Past for Investors Today"
by Dimson & chambers is free to read in kindle.

 
If you are un-informed and un-interested in investing, active investing is not for you so it make sense to invest in index funds, to be average.

But here is an argument against indexing:

If you are keenly interested in investing and are willing to learn, then it is worth your while to make an effort to be better than average. As long as you do not take on undue risks, excessive leverages, then ,your chance of beating the market is actually not too bad, statistically. As an example, of the 30 DOW stocks, 15 will be higher than the median and 15 below, so if you pick 10 randomly, you should have a 33% chance of doing better than the DOW median?

If after a period of trying and you are not doing better than average, for most 20-30 something, there is still time to go back and be average.

I am not so sure about trading however, mainly because of commission costs and slippages. Perhaps some other elite traders can defend day trading for us.
 
ironchef said:
If you are un-informed and un-interested in investing, active investing is not for you so it make sense to invest in index funds, to be average.

But here is an argument against indexing:

If you are keenly interested in investing and are willing to learn, then it is worth your while to make an effort to be better than average. As long as you do not take on undue risks, excessive leverages, then ,your chance of beating the market is actually not too bad, statistically. Di.
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Disagree. This is the tired old argument of the active investing.
I posted the SPIVA report upthread.

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Investing is a long game. When portfolio managers who are very much interested in investing, supposedly better learnt than average goe picking stocks, on a risk adjusted basis failed to beat the index by 85% to 95% of the time. Also you have close to zero probability of identifying those managers before.

ironchef said:
. As an example, of the 30 DOW stocks, 15 will be higher than the median and 15 below, so if you pick 10 randomly, you should have a 33% chance of doing better than the DOW median?
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OK from above observed data, 33% seems reasonable to beat the index in one year. But one has to do each and every year. From your example same 15 stocks does not outperform index every year. So cumulative probability of beating index goes down each further year. That is before cost drag and tax drag.

ironchef said:
If after a period of trying and you are not doing better than average, for most 20-30 something, there is still time to go back and be average.
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This is terrible advise. One of wonders of investing is the compounding effect and reduction of risk thru' time. If you loose time earlier, one needs to be riskier during their later year which exposes them to "sequence of returns".

I am not against trading, being trader myself. Trading and investing is two different things. For security investing there is no better way to do then indexing.

There is no point in trading same 15 equities as you mentioned. Big cap stocks are researched and arbed to death for any inefficiencies. Trading in my opinion is more about adding another source of return not realized by the "equity risk premium" for stocks or "term premium" for the bonds. Trend trading (momentum), Carry, Short index vol, private equity (liquidity premium) and to some other diversifiers like CAT bonds & micro lending diversifies index investing and make much more sense.
 
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srinir said:
Disagree. This is the tired old argument of the active investing.
I posted the SPIVA report upthread.

View attachment 178766

Investing is a long game. When portfolio managers who are very much interested in investing, supposedly better learnt than average goe picking stocks, on a risk adjusted basis failed to beat the index by 85% to 95% of the time. Also you have close to zero probability of identifying those managers before.



OK from above observed data, 33% seems reasonable to beat the index in one year. But one has to do each and every year. From your example same 15 stocks does not outperform index every year. So cumulative probability of beating index goes down each further year. That is before cost drag and tax drag.



This is terrible advise. One of wonders of investing is the compounding effect and reduction of risk thru' time. If you loose time earlier, one needs to be riskier during their later year which exposes them to "sequence of returns".

I am not against trading, being trader myself. Trading and investing is two different things. For security investing there is no better way to do then indexing.

There is no point in trading same 15 equities as you mentioned. Big cap stocks are researched and arbed to death for any inefficiencies. Trading in my opinion is more about adding another source of return not realized by the "equity risk premium" for stocks or "term premium" for the bonds. Trend trading (momentum), Carry, Short index vol, private equity (liquidity premium) and to some other diversifiers like CAT bonds & micro lending diversifies index investing and make much more sense.
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I was not talking about investing in an active fund. I was talking about investing in equities, or their derivatives directly.
 
It does not matter whether you did it or some well informed, highly educated portfolio manager does it. Any deviation from indexing is active investing

Take away from SPIVA report is that, average Joe does not stand a chance, when those highly regarded, well endowed portfolio manager failed.
 
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