Author Topic: Article - The Big Lie of Market Indexes, thoughts?  (Read 2772 times)

bob999

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Article - The Big Lie of Market Indexes, thoughts?
« on: May 25, 2018, 02:25:07 AM »
Hi all,

I am a indexer but found this article that says indexing is not ideal and returns are not accurate. Interested to hear your thoughts, specially from more experienced indexers.

https://realinvestmentadvice.com/the-big-lie-of-market-indexes/

Thanks.

SansSkill

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #1 on: May 25, 2018, 02:40:56 AM »
Had a quick read, it's mostly strawmans.
His whole biggest argument against not following indexes is that you can't beat it.
Yes? That's why I'm following it, because trailing slightly behind is better than I can do on my own, especially given the (lack of ) cost and time expenses for buying into it.

Also the whole compouding is a myth thing? The graph doesn't disprove it, it actually proves it. It just disproves a secondary claim that the market always goes up. It actually proves it by showing that even with all the ups and downs the end result is up.

And the "16 year to break even" graph is also bull. It's just cherrypicking, yes if you picked literally the worst time to dump all your savings into the market you'd not start seeing profits until 16 years. Isn't that great? Literally the worst time to invest in the last 2 decades was still profitable after merely 16 years? Any other time and you'd see more net profits even earlier.

And the "annual return of 6% doesn't live up to its promises" graph? Most people I know use 5% real return as benchmark. So again, unrealistic high expecations set as reasonable just to turn around and claim that no, unreasonably high is unreasonably high.

cerat0n1a

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #2 on: May 25, 2018, 03:20:16 AM »
The line "Here is what you should take away from the two graphs above. Assuming that an individual was 35 at the peak of “Dot.com” bubble, they are now 51 years of age and are no closer to their goals than they were 16 years ago." is comedy gold.

Obviously the way that people plan for retirement is to put a $100 000 lump sum into an index fund at age 35 and then invest nothing further until they're 51.

YttriumNitrate

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #3 on: May 25, 2018, 06:04:00 AM »
Check out the chart that is described as:
Quote
The blue line is what actually happened with invested capital from 35 years of age until death, with the bar chart at the bottom of each period showing the surplus or shortfall of the goal of 6% annualized returns.
and then look at the supposed years of death. Apparently, he thinks the average 35 year old in 1901 would only live to the age of 49. While life expectancy at birth might have been 49, the life expectancy of a 35 year old was significantly higher since they had made it through all those nasty childhood diseases. The actual life expectancy of a 35 year old in 1900 was closer to 70.

In other words, the author of this article is really bad with math and/or statistics and I feel sorry for anyone who lets him invest their money.
« Last Edit: May 25, 2018, 06:07:13 AM by YttriumNitrate »

acroy

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #4 on: May 25, 2018, 07:20:35 AM »
this was a 'goal-seeked' article. Author wrote a click-worthy headline then manipulated / cherry picked the data to make a case. Torture the numbers enough and they will confess to anything ;)
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bisimpson

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #5 on: May 25, 2018, 08:27:49 AM »
Interesting. On the compounding question—won't managed funds use the same tools to assess their performance? And yes—the cash I invest today might drop and take 16 years to recover, but what will the cash I invest this time next year do?

shinn497

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #6 on: May 26, 2018, 10:31:27 AM »
This is the most cherry-picked article ever. He literally took the worst period to invest in.

The important thing to remember is that you don't invest to liquidate. You invest ot pull out a tiny bit over time. So it doesn't matter if your portfolio is down at any one point in time. It will always recover in the future.

Early retirement now did some excellent simulations, calculated withdrawal rates, and found that having more equities makes your portfolio more likely to persist over time.
« Last Edit: May 26, 2018, 12:38:48 PM by shinn497 »

Mighty-Dollar

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #7 on: May 26, 2018, 10:13:50 PM »
Conflict of interest: Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. Asset managers are always going to data mine in order to convince you to pay them to manage your money. I won't be abandoning index investing for active management.

"In study after study, year after year, it has been shown that the vast majority of actively managed mutual funds underperformed their [benchmark index funds]" -- Jim Cramer

Mr Mark

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #8 on: May 27, 2018, 01:36:34 AM »
This is a really brilliant* article. It reminds me of the pseudo-arguments used to sell variable annuities. It seems so... scientific and data driven, that the conclusions must be correct!

First, the author is very clever. He's indeed cherry picked 'facts' to try and attack index funds and (hopefully) convince people of the usual story from such financial advisor/investment funds:
1/ The stock market is a very risky place - look at this!
2/ At some time you will probably lose most of your money overnight! Remember 2008? 1999? 1931?
3/ If you invest in index funds you are only ever going to get at best average returns. So you're risking all your money for mediocre rewards, while having to invest in crazy overvalued companies like Facebook and Tesla.
4/ So give me your money, and for an insignificant fee I'll be very clever, and we'll work to preserve your capital and get great returns**.
5/ You probably haven't heard of a universal whole life variable annuity have you? You can never lose money! When the stock market goes down we insure you against any losses! And when the stock market goes up, you'll get a great return, tax free!  Just sign here.

[*brilliantly evil and deceptive, that is]
[** past performance is not a guarantee of future returns.]

The whole article is filled with a lovely mix of pure bullshit, misleading analysis, 'bait & switch' tactics, cherry picked time periods and mutually inconsistent motherhood statements/non sequiters. It makes me want to scream at him the whole time.

For example: He shows the SP500 index from 1990-2017 and claims it shows a terrible return.

Quote
The chart below shows the impact of losses on a portfolio as compared to the commonly perceived myth that investors “average 8%” annually in the stock market.

.


He thus compares a theoretical 8% CAGR (apparently a commonly perceived myth) against an inflation corrected SP500 index number with no reinvestment of dividends, from 1990-2017. Wow, that's so apples to oranges, but it does have the 'advantage' of making the "index" seem to lose $500k! Why is this so evil?
1/ He claims 8% is 'promised'. OK, but typically this 'promise' is nominal and includes both inflation and dividends.
2/ He then compares this against a bare index that he deflates to make it 'real', and
3/ Does not reinvest dividends
4/ Makes the analysis very time period dependant because he never makes any periodic contributions.

Eyeballing his chart he claims the initial $100k in the SP500 ended up 27 years later at ~$300k (real), leaving a supposed 'shortfall' of $500k.

However, when I use https://www.portfoliovisualizer.com/ I get very, very different results from ol' Lance (he's a Chief Portfolio Strategist/Economist you know).

In actuality, such an investment of  100% US stocks for $100,000 in 1990 grew by 2017 to a nominal $1,330,000, or $685,000 in 1990 dollars after inflation correction. That's a real CAGR of about 7.7% (In fact, from 1990-2017 with 100% US market we get a nominal CAGR of 9.7%, easily beating his strawman! LOL.)   

In another example he uses a hypothetical 35 year old, but this idiotic 35 yr old neither makes any further regular contributions after the initial investment, nor does he compound his dividends post investment, and he seems to always invest in periods with some big drops in the index. Little wonder his 'returns' totally suck (according to Lance that is).

He also fills the article with the sort of meaningless down-home fortune cookie homilies that'll have grandad nodding like a bobblehead, such as "You can replace lost capital – but you can’t replace lost time" and the improtance of "Capital preservation", plus pseudo-fact sounding claptrap like "The impact of losses, in any given year, destroys the annualized “compounding” effect of money."

The article makes me angry. I just hate the idea of older people reading this type of total bullshit and thus being convinced to let this idiot manage their money. I'd bet dollars to donuts he'll be selling them some kind of zero liquidity variable annuity / whole life shit or analgous products. So they're 'protected' and sure to 'meet their goals'.

Grrrrr.

Mr. Mark

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DavidAnnArbor

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #9 on: May 27, 2018, 06:54:51 PM »
Very good analysis Mr. Mark. I wonder if Lance Roberts would write a response?

Mr Mark

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #10 on: May 28, 2018, 03:47:11 AM »
Very good analysis Mr. Mark. I wonder if Lance Roberts would write a response?

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

Which is true, but I think many of these so called 'advisors'  do understand full well that they are parasitising people and consciously choose to be more Machiavellian.  If these financial advisors were made to act as true fiduciaries (and not just wrt federal retirement accounts) it would make a big difference. But then there would be no gravy train for Lance and his ilk to ride on, just by taking his cut from hardworking people's pension savings.

If best advice is going to be 'put it in Vanguard and Fidelity where they'll only charge you 0.04% in fees' you're out of business. Hell, even Vanguard have a cacophony of different funds and ETFs.
Mr. Mark

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DavidAnnArbor

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #11 on: May 28, 2018, 05:00:29 PM »
It's a shame the new administration is nixing the fiduciary rule for these advisors.

ditheca

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #12 on: May 29, 2018, 03:24:50 PM »
I once sat down with a financial adviser.  He was a man I greatly respected for honesty, integrity, and familial piety.  I was secretly wondering how he justified his career choice given everything else I knew about him.

It was an enlightening discussion.  He strongly believed that he was offering a valuable service.  Although he didn't state it in these words, I eventually realized that his purpose was to completely eliminate risk for his clients. 

Obviously, Economics 101 tells us that the return on zero risk is going to be pretty pathetic.  On the other hand, it was nice to realize that there is a certain demographic that can benefit from this kind of financial advise.

OurTown

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #13 on: June 06, 2018, 03:02:33 PM »
"The Big Lie" was that article.

soccerluvof4

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #14 on: June 07, 2018, 03:12:39 AM »
I believe his only intention with this cherry picking article is just this...., getting people to talk about hit good or bad. Very thin for anyone that knows a thing or two about indexing but sadly there are so many people that know nothing about investing period.
" In life you don't get what you deserve you get what you negotiate"

MustacheAndaHalf

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #15 on: June 07, 2018, 08:31:32 AM »
In the past 10 years, 90% of large cap funds were beaten by the S&P 500.
https://us.spindices.com/documents/spiva/spiva-us-year-end-2017.pdf


phred

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #16 on: June 07, 2018, 12:08:36 PM »
First off, he is a salesman trying to sell you something -- a newsletter.

True, index funds aren't perfect, but then what is?  If the market goes down, then the index goes down.  How could it be otherwise?  Just because you are in an index does not mean you don't have to follow the market.
  I guessed at the 2008 disaster, moved mucho money out of the index funds and into money market and Treasuries.  Then, you just have to wait until it's time to go back in.  It's a gamble, but so can be letting your money just sit there.  If you have twenty years, then everything probably works out.  If you have less than twenty, or are close to retirement then you may need to pay closer attention

Eric

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #17 on: June 07, 2018, 04:46:01 PM »
I guessed at the 2008 disaster, moved mucho money out of the index funds and into money market and Treasuries.  Then, you just have to wait until it's time to go back in.  It's a gamble, but so can be letting your money just sit there.  If you have twenty years, then everything probably works out.  If you have less than twenty, or are close to retirement then you may need to pay closer attention

You got lucky once.  That's all it was, luck.  It's not from "paying attention" to the markets.  No one knows which way the market is going to move on any given day, month, or year.  Thinking that you do know is more likely to end poorly, since market timing is a fool's errand.

Letting your money "just sit there" is not a "gamble".  That's called investing.  Buy and hold long term investing allows you to ignore short term volatility.  There's a reason why Fidelity's best performing portfolios were owned by dead people.  Live people like yourself are more likely to screw it up than you are to actually time it correctly.  The next time you "pay closer attention" you're more likely to fuck it up than you are to help yourself.  Don't advise people to do stupid things like this.
"Compound interest is the most powerful force in the universe."  -- Einstein

Scandium

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Re: Article - The Big Lie of Market Indexes, thoughts?
« Reply #18 on: June 08, 2018, 08:15:31 AM »
Even if technically true (which is dubious as well) the index still does better than managed funds, so still the best option! I only skimmed that drivel, but I didn't see him offer any other "solution"?

Lol, I also like that he starts with an email from a "reader" which is just a statement. Then says "That's a great questions". There was no question!

Quote
The “Big Lie” is that you can “beat an index” over an extended period of time.

What?! Who says this? I've never heard this. "an index can beat the index", who would say that??