for those open to index funds

[IlliniDave]

If your view of index funds is best described as disdain, then you probably don't want to waste you time. The article linked below is pretty long.

For those more open to the tactic, the article is interesting if you enjoy people's accounts of how we got from where we were to where we are through the eyes of people who were in the thick of it. I love confirmation bias (when I find out people much smarter than me parallel my own conclusions). Ellis expresses things better than I do, but my main focus as an investor is not investment tactics, but figuring out my temperament, goals, and how to make the stash serve me rather than the converse.

Investors now can — and we all certainly should — use the time liberated by that switch to focus on important long-term investment questions that center on knowing who we really are as individual or institutional investors. We should start by defining our true and realistic long-term investment goals, recognizing that each of us has a unique combination of income, assets, time, responsibilities, experiences, expertise, interest in investing, et cetera, et cetera. Then, with a realistic understanding of the long-term and short-term nature of the capital markets, we can each design realistic investment policies that will enable us to enjoy long-term investment success. This is important work and should be Priority One for every investor.

https://www.institutionalinvestor.com/a ... Ai6W-UrJrQ

[7Wannabe5]

I think the part about "knowing who we really are as individuals is key." I know you follow some Buddhist practices, and I am currently re-reading "The Seven Stage of Money Maturity: Understanding the Spirit and Value of Money in Your Life" by Buddhist teacher George Kinder.

https://www.amazon.com/Seven-Stages-Mon ... s=buddhist

Filled with practical information, market-tested, wealth-building skills, personal success stories, and spiritual guidance, The Seven Stages of Money Maturity is an invaluable guide to a rich--and richly lived--life.


1. Innocence--The childhood state we are born in, devoid of any concept of money
2. Pain--The discovery that we have more money than some and less than others, and that work is necessary to make a living
3. Knowledge--The intellectual task of learning financial techniques such as saving, budgeting, and investing
4. Understanding--The emotional work done in coming to terms with feelings around money, such as greed, envy, and resentment (which are rooted in Pain)
5. Vigor--The energy (physical, emotional, and spiritual) that must be expended to reach financial goals
6. Vision--The direction of Vigor outward toward the health and welfare of communities, with or without profit motive
7. Aloha--The compassionate goodwill that allows one to use money to perform acts of kindness without expecting anything in return

Using THE SEVEN STAGES OF MONEY MATURITY, readers will understand each encounter with money as a step toward awakening; a lesson about the relationship they share with others as well as with the self.

It might seem like this is off topic but I think you were communicating from this perspective or model with

my main focus as an investor is not investment tactics, but figuring out my temperament, goals, and how to make the stash serve me rather than the converse.

I am currently wallowing a bit back in Stage 4 due to the fact that living with my mother is putting me back in the dysfunctional corner of my adolescence where I was my frugal father's daughter siding against my spendthrift mother.

I think maybe what you and some others are trying to communicate about choice to make use of mutual funds, other more other managed investment vehicles, is that different individual will vary in their healthy boundaries between Vigor expended at Level 5 before choosing to expend Vigor at Level 6?

[suomalainen]

The excerpt is a good summary of my own thoughts, developed over the years. Confirmation bias indeed. But then again, I haven't really read anything that would support the notion that active management can beat the market! Is that just confirmation bias all the way down? Clearly, based on other threads, there are folks here who disagree. But, it seems like they aren't disagreeing with whether active management (net of fees) can outperform the market; rather, they make the curious assertion that the market return is irrelevant. For someone who does make that assertion, can you expand on what you mean by that?

Putting that aside, assume you think you can be a "good investor" or choose a "good manager". Further assume that good investing or good selecting of a good manager requires skill rather than luck. Further assume that skill requires a combination of innate skill (aka genetic lottery) as well as time and effort to develop that skill. Finally assume that investing skill is normally distributed throughout the population like any other skill. Put that all together, and the upside risk that I can outperform the market (what I consider my BATNA) is far outweighed by the downside risk that I can't...partly due to that idea mentioned by the first two commenters that I don't have the temperament (time, energy, inclination) to develop whatever innate skill I do or don't have (most likely don't). As a result, I am mostly an index investor, with some portfolio management thrown in for sanity, some buy-and-hold stock picking thrown in for fun and very minor occasional trading thrown in for good measure, and I focus my time and energy on other things, like trying not to murder my children!

But to those select few who do have above-average investing skill and the time and energy to develop it, I salute you.

[IlliniDave]

It might seem like this is off topic but I think you were communicating from this perspective or model with

my main focus as an investor is not investment tactics, but figuring out my temperament, goals, and how to make the stash serve me rather than the converse.

...

I think maybe what you and some others are trying to communicate about choice to make use of mutual funds, other more other managed investment vehicles, is that different individual will vary in their healthy boundaries between Vigor expended at Level 5 before choosing to expend Vigor at Level 6?

I've never seen that model before so any paralleling of it in my words is accidental.

I don't choose mutual funds so I can use my wealth to make the world a better place. I use mutual funds for two primary reasons. First, I believe the odds I can do better on my own are vanishingly small and the odds of doing worse are quite high. Second, the type and magnitude of effort required to sit at the table and chase after those vanishingly small odds of success don't appeal to me. When it comes to index funds versus the universe of actively managed options, I'm just yielding to the academic consensus. I consider that decision to exist in the tactical realm rather than strategic. IOW for example, having made the strategic decision to invest in stocks with a broad exposure to US and international markets, I then select what I feel are the best vehicles for the exposure, which happens to be primarily (but not exclusively) index funds.

Off the top of my head I'd say for me it seems like a matter of recognizing the most efficient way to navigate Step 5. My step 6 would be a more selfish version of step 6 in that model, but with that allowance there is a trade between how much time I want to invest trying to make extra money in capital markets and getting on with the next (and probably final) phase of my life.

[JamesR]

If your view of index funds is best described as disdain

Is this common on this forum? I was under the impression that the majority of ERErs do quite a bit of index fund investing?

[IlliniDave]

If your view of index funds is best described as disdain

Is this common on this forum? I was under the impression that the majority of ERErs do quite a bit of index fund investing?

Index funds seem to be polarizing no matter where you go. There's a good contingent of people that use index funds here, but some that don't seem to hold the tactic (or people that use it) in the highest esteem. Which is fine. I didn't want to start another "discussion" on the pros-cons of index funds or people who use them, nor to make converts; so because of the length of the article I though it fair to warn people who would possibly take offense at the subject matter or be annoyed by a long, mostly anecdotal recounting of one guy's carer in that particular stream of investing style.

[bryan]

The disdain is a more recent, growing sentiment, I think. Mostly because they (VTSAX et al), and the advise to speculatively buy them, seem to be the most popular method for investing for retirement, now. Basically it seems a lot of dumb, easy money is (and has been) increasingly going to one meta-thing which means more greener grass elsewhere (e.g. "private markets are the new public markets").

If the stock market was like sports betting (hint: it is; though perhaps derivatives are closer?), roughly it would be like more and more people betting heavy that any one of the pre-season NFL favorites (top 4, 8, etc.) will win the championship. More accurately may be buying ownership shares of those top teams, but the betting analogy is pretty good to show how dumb money creates inefficient markets/prices/returns.

Of course one part of the explanation for disdain could be my own bias (age or networth specific..) which could also be a slice of some larger trends (like growing inequality, rich xor poor millennials, retiring boomers, etc.).

[IlliniDave]

The disdain is a more recent, growing sentiment, I think.

The big investment companies knew right away what the data said and what the long-term implications were for them. The first was initially hailed widely as "Bogle's Folly" and posters (the Facebook memes of the day) were circulated around the financial hubs featuring Uncle Sam stating index funds were "un-American" and should be stamped out. This was before the original Vanguard 500 index trust even had $100M AUM and Wall Street et. al. were collectively losing less than $1M/year to it. Now that number is well into the 10s of billions per year.

[bryan]

I meant recent disdain among ERE folks (and who we preach to, or who think similarly regarding investing, at least), of course!

[Farm_or]

Independent thinkers = independent investors

I have been following the growing trend of index and etf passive investing.

It's putting a hurt on the bloated financial industry+

It's changing the way the market works - (?)

[bryan]

> recent disdain

Timely addition to the 10k: http://www.snl.com/Cache/c392383937.htm ... SK_FACTORS

BlackRock has been the subject of third-party commentary citing concerns about index investing and common ownership.

As a leader in the index investing and asset management industry, BlackRock has been the subject of third-party commentary citing concerns about the growth of index investing, as well as perceived competition issues associated with asset managers managing stakes in multiple companies within certain industries, known as “common ownership”. The commentators argue that index funds have the potential to distort investment flows, create stock price bubbles, or conversely, exacerbate a decline in market prices. Additional commentary focuses on competition issues associated with common ownership and purports to link aggregated equity positions in certain concentrated industries managed by asset managers with higher consumer prices...

and a related sentiment where you index some market and your new index ETF becomes the overwhelming buyer/seller of the said market.

[BlueNote]

There's an argument that more indexing is bad because it makes markets somehow less efficient. Usually this argument is supported asking the reader to imagine what it would be like if everyone (or damned near everyone) indexed. The likely result is that obviously good and obviously bad investments would be ignored and priced very inappropriately compared to their intrinsic value. OTOH there's the argument that more indexing is good because not only does it give the ignorant known-nothing investor an easy way to avoid some risk with good expected returns it also improves market efficiencies by removing the suckers from the market. I personally think that the former argument is based on a very unlikely scenario so I subscribe more the latter. Then again indexing could just be a fad, there are other strategies that show similar long term results over different geos, asset classes etc. Indexing requires the same discipline and long term commitment any other strategy demands. As many studies have shown people generally don't have the right stuff for investing so they screw up any reasoned investing strategy by trading too much and making emotional decisions, essentially they don't follow the strategy. Active management is probably better on average then the average individual retail investor at following a strategy , the index is better than both but there just aren't too many people who stick to the index (or whatever strategy they've chosen) for long enough to get those average returns.

Also people do beat the markets and it's probably a lot easier when you're a disciplined, capable, and unbiased individual as opposed to some huge fund manager subject to enormous social, regulatory and cultural pressures that preclude you from investing in many good opportunities.

[PhilosopherSarah]

I am just starting to independently invest (previously, TIAA and Fidelity invested for me), and I figured that while I am still learning, a socially responsible index fund might be a good choice. Has anybody thought about those options? My goal is to be able to wisely independently invest, but in the interim I want my money invested somewhere. Before this I did real estate investment, which I know much better. But right now I do not want to bother will all the work involved in this form of investing. And also, I no longer want to take on any mortgage debt, which I had before.

Also, it seems like there are so few books on socially and environmentally responsible investing. Does anybody know of any really good ones? My local library has one. Only one!

For example, I am looking at this index fund, which I would like to put my ROTH IRA into.
https://personal.vanguard.com/us/funds/ ... irect=true

Would this be a relatively safe, relatively ethical bet for a while? Any thoughts on this? Thanks!

[PhilosopherSarah]

So, I just did a little more research on that fund, and it's got companies like Apple, Amazon, Facebook and Google in it.

I suppose if you want to "ethically invest", you really have to do it yourself. Sheesh.

[IlliniDave]

So, I just did a little more research on that fund, and it's got companies like Apple, Amazon, Facebook and Google in it.

I suppose if you want to "ethically invest", you really have to do it yourself. Sheesh.

Yes, the problem with those type funds is that you have to find one whose ethics align with your own since there is no single universal definition of ethical.

[Mister Imperceptible]

Might index funds be better to buy in the wake of a bear market, to ensure you at least get a piece of the “next big thing” that goes up 10,000%? Suppose I’m a value investor. I might make some excellent picks and achieve a solid return, but I don’t hit any home runs. Index funds (in combination with individual stocks) in this way protect you from “upside risk.”

It’s now when valuations are high that index funds especially scare me.

[IlliniDave]

It’s now when valuations are high that index funds especially scare me.

In that context mutual fund management processes become irrelevant to me. Stock premiums are quite high right now, so stocks are a little worrisome. How a basket of stocks is chosen and managed within it's subspace of the capital markets usually isn't the determining factor once the arrow starts pointing steeply down. That's among the reasons why I excerpted the bit above that I did in my OP.