Index fund investing should be efficient and low cost. The goal is to capture market returns less a small fee in a diversified portfolio that covers basic asset classes. When constructed correctly, an index fund portfolio provides the highest probability for reaching your long-term investing goals.
You’ve learned to discount high-cost, actively-managed funds, ignore Wall Street brokers, and see the pitfalls of model ETF portfolios that use tactical asset allocation and charge high fees. You’ve seen the light and clearly understand why a low-cost index fund portfolio has the best chance to achieve your investment goal. Now you want to help others find their way out of the darkness.
Bond returns depend upon the purchase price, yield at the time of purchase and sale price. The rest is math. Unfortunately, investors often struggle with which “yield” to use when trying to compare investments. There are many, and using the wrong yield may yield disappointing results.
Here is a market prediction for 2015: investing will be a zero-sum game. Okay, that isn’t much of a prediction because the concept of markets as zero-sum is not new and it applies at all times. Still, understanding this concept can help you make better investment decisions in the new year and beyond.
Index investing has attracted a growing number of investors because of its ability to provide lower cost and better performance, on average, than active investing over the long run.
Times have changed since the first publicly available index fund was launched by John Bogle and the Vanguard Group in 1976. Back then, critics called it “Bogle’s Folly.” One competitor even circulated a propaganda poster featuring the likeness of Uncle Sam with the slogan: “Help Stamp Out Index Funds – Index Funds Are Un-American!”
Using short-term market information to invest for the long term is like trying to put a square peg in a round hole. Daily market conditions are erratic, which makes it hard to see how you can make successful investment decisions to reach a relatively stable long-term goal, such as retirement.
If exchange-traded funds (ETFs) were food, they’d be the best thing since sliced bread. That’s demonstrated by the fact that since their introduction in 1993, investors have been buying them like hot cakes. Apologies for the saturation of food metaphors, but it’s meant to represent the excess ETF choices now available.
“The question is, when is active management good?
The answer is ‘Never.’”
–Eugene Fama, Morningstar ETF Conference
on September 18, 2014
English philosopher Thomas Hobbes suggested that good and evil are relative, depending on what an individual seeks and avoids. In other words, an act can be good in some circumstances but evil in other circumstances.
“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” –Warren Buffett
Every investor should understand that longtime investing is not the same as long-term investing. The former simply entails buying and selling assets over several years. Meanwhile, the latter requires you to buy, hold and maintain selected assets through thick and thin.
Plenty of investors find themselves unintentionally conflicted between the two.
I wrote the book, The Power of Passive Investing, so you’d expect me to be the last person to say there’s no such thing as passive investing. It’s true. Passive investing in its purest form doesn’t exist. Only lesser degrees of active management exist. Passive investors shouldn’t let this get in their way.