Five Myths About Index Investing

[Dividend Growth Investor]

Index investing has become extremely popular in recent years. A lot of new investors have embraced the strategy in recent years. Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true. I am going to examine several of their problematic thought points, and discuss why they are myths that could hurt those investors in the future. In reality, there is nothing magical about index investing.

I refuted some of these myths in an article I posted on my site.

MOD EDIT: Spam link removed.

The chief reasons for investor failures includes:

1) Not Saving Enough
2) Failure to develop and stick to their plan through thick or thin
3) Paying high investment costs for commissions, advisers, taxes
4) Overtrading
5) Chasing Performance
6) Blindly following others

I would be curious to hear your thoughts on the topic.

DGI

[Ramparts]

I think your link is a bit messed up - it has an extra "/url" at the end of it.

When that was removed, the actual page was hard to read behind the giant "Join Our Newsletter" banner spam.

[mjr]

What do the mods think about blatant "come and look at my site" posts ?

[AZryan]

Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true.

How do you know that? Doesn't really matter, but a broad, baseless claim isn't the best way to start an article meant to 'fix' misconceptions about 'myths' and 'magical' thinking.

"-The chief reasons for investor failures includes:- ..."

None of those 6 points are myths about index investing -the 'subject' of this thread. And none are problems specifically inherent in index investing. But I see the article itself has that list...

1) Indexing is passive investing.

You claim it 'isn't', but yeah, it pretty much is. The typical recommendation (certainly here at the least) would be to open a fund in the Total Stock Market or 500 Index (which are fairly close to identical results), and just consistently add savings to it. That's an extremely passive approach to investing. The details you note about how the fund changes holdings over time, etc. don't matter. It can still be highly passive for the actual investor auto-funding it every month.

"-In contrast, a dividend investor can build a diversified portfolio of individual dividend stocks,-"

Yeah. And in contrast, that's not passive at all. You have to actively research, pick and choose whatever that ends up being. 'Actively' picking the broad market index is as passive as you can get (beyond doing nothing at all and hoping someone just gives you money).

"-and just hold on to it through thick or thin, without paying any costs or having much forced turnover.-"

At that point, it's essentially as passive as an index. But what if one of your stocks goes private? Or goes under? Or has a merger? It's not like you now control everything because it's not an index.

"-This is a much better form of passive investing, which has worked in the case of the Corporate Leaders Trust, or in the case of the millionaire dividend investor Ronald Read.-"

This a lousy argument. You simply state 'it's much better' for no actual reason. Then you site some group and a random millionaire as your 'authority'. I can counter this claim the same way by noting BILLIONAIRE W. Buffet's advice that almost everyone should be an index investor. Now, if I wanted to make a 'real' argument, I'd note his decade long bet that he's about to win and how most investors can't correctly guess what to invest in to beat the broad (index) market.

2) Index investors do better than other investors.
"-There is no data to support this claim.-"

It's been well established and there are tons of articles noting that active investors can't consistently beat the market. If anything, you're just being kinda 'shifty' here because you can say you don't know that actual index investors win. But that would only be because they just do stupid things they were commonly told not to do. It's a weak argument to blame the index.

"-The only real reason that index funds have done better than mutual funds is because they have lower costs and lower turnover rates than other regular mutual funds.-"

That isn't the only reason. But it is a reason, which is enough to give a point to Index investing for that fact alone.

"-It is pretty simple to identify a number of companies to include in a portfolio, and then set it and forget it. It is as simple as identifying 15 – 20 index funds to include in your portfolio.-"

Totally baseless claims. And where do you ever see (much less 'typically') people recommend someone pick 15-20 Index funds??? I've never seen that ever in my entire life. That's a total Straw Man.

"-my dividend portfolio has done better for me than any index fund portfolio I could have selected had I gone strictly to the indexing route.-"

One more unproven claim. Those really suck. Stop doing it.

"-However, I will never be so arrogant as to tell you that my portfolio is better than yours.-"

That wouldn't be 'arrogance', it would be 'delusional imagination' because you obviously just don't know what everyone else's portfolio is. That should go without saying, but you say it like you're being humble about it? It's really weird.

3) You do not need to save as much with index investing
"-many novice index investors believe that they need to save less than anyone else. As I mentioned in the myth above, investors do not know their future returns in advance.-"

Again... 'many' used as a 'weasel word'. You don't actually know how many people think they need to 'save less' because they're in Indexes. That's a complete fabrication. And I don't know that anyone thinks they know their future returns in advance. I certainly have never seen anyone ever post that they did. And if they had, I'm sure the very next poster would inform them that they're wrong.

"-In fact, there was one former dividend investor who prides themselves on spending too much money.-"

These sort of detail-free anecdotes are just awful. Please learn to fill in the blanks if you want to use specific examples in defense of your claimed wisdom. Also, if it was a 'former' investor, then it would be 'prided' not 'prides'. You write 'abandoned' and then 'they expect' rather than 'expected'.
Mixing up past and present just makes it look even more like pure fabrication.

Also, one person who did anything doesn't make any sort of a case for you. The point of that paragraph was a complete mess.

4) I will stick to Index investing through thick or thin

This is not a 'myth' of index investing. It's just frequently sited advice. It's great advice, so I see no reason to knock it or call it a 'myth'. Just because people can fail to follow it is not the Indexes fault. And how does this same idea not hit dividend stock pickers who have typically far less stocks than the hundreds or thousands in major index funds? Getting scared when one of a handful of stocks looks bad ought to be a stronger urge than when an Index fund has an occasional drop. The volatility ought to look far smoother in the Index fund, which tends to chill people out.

"-The funniest myth I have heard, comes from individuals who claim that they will stock to their active selection of index funds no matter what.-"

Ought to fix that typo-o. And 'claims' aren't myths. You should fix this whole article to reflect that fact. And 'active selection' is a goofy phrase here. If people initially select a few major index funds, keep them and don't swap them for others at random (and I think that's what typically happens), you can't call that 'active selection' except for the initial selection of someone asset allocation.

Do you think many, or most, index investors switch to different indexes when there's a drop or crash? I've never heard of that happening, much less, being common. I can see people getting scared and pulling out of an index in a crash (against common advice), but that rarely changes the index funds they're actually in. You seem to imply things that no one really does. Again, a very Straw Man attack.

"-Most people who today swear by indexing have only been doing it during a recent bull market.-"

Completely baseless claim. Just like you have no proof, I also can't prove it's not true, but I know it's not true of myself, and I think it's more likely that I'm not magically unique when so many here have made similar disclosures.

"-For whatever reason, I did not hear about the simplicity of index funds from anyone during the 2008 – 2012 period, where their past performance was abysmal.-"

Selective blindness, probably. Also, we've been in a bull market since the bottom of the crash in 2009. That's most of the 2008-2012 timeframe you listed. You seem totally confused. Your claim of 'past performance was abysmal' is nonsensical, too. My Index funds dropped BIG in 2008-9. I tried to put more money in, but basically, I just left it alone and got all my money back and more. Lots of people did. And ALL of them would've if they followed the 'just stick with it' advice that comes with most Index investing recommendations.

"-This showcases the fact that index investors essentially continue their habits of chasing what it hot today, after it has gone up.-"

This showcases nothing. It's simply your imagination. That's not what 'fact' means. And if anything, they'd be chasing a 'hot' market rather than a 'hot' company -which is still the safer, smarter, lesser of two evils.

"-I am just hopeful that they won’t end up “changing their asset allocation to become more conservative”, if their selection of index funds starts going down.-"

Following common advice (once again), investors would rebalance from bonds into stock funds. That would make their portfolio less conservative than before the rebalance, and long-term, keep the portfolio at exactly the same level of moderation.

It's one of the few minor things an otherwise very passive investor is asked to do.

"-Many index investors continue timing the market, constantly buying and selling investments,-"

You definitely aren't talking to the people on this forum.

5) You do not need to worry about anything with index investing

Who do you think actually believes this?? You seem to be aiming at the dumbest people you can find.
Most of this section has you going on about valuations. You seem to be arguing then that you can beat indexes by going for undervalued P/E's with big dividends? But it all ends up being implications the reader needs to interpret. Even if someone wanted to blindly follow you, there's nothing there to follow.

If you're going to go off on how most Indexers are doing it all wrong and following your imaginary myths, you ought to tell them how to do it right (and risk people tearing your strategies apart).
Otherwise, it just looks like you're trying to make yourself sound like an investing master, but with no proof at all that you even know what you're doing.

Here's the bottom line... if it's SO EASY to pick 15-20 stocks that are big winners that you can 'set and forget', then just TELL US what stocks you picked so we can all copy you! Why's THAT list not included??

[AZryan]

What do the mods think about blatant "come and look at my site" posts ?

I think they think it's ok if it's useful, interesting, helpful, etc. And if it's screwbrained, it'll get what it deserves. See previous post...

[matchewed]

How about you just engage in conversation instead of linking your blog?

See forum rules please.

[steveo]

AZryan - good response.
Dividend Growth Investor - I didn't read the article but from what I can see on here you haven't structured your idea within that blog post at all well.

Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true.

You state that there are myths related to index investing. Myths to me are something that are widely accepted as being factual but aren't factual.

The chief reasons for investor failures includes:

1) Not Saving Enough
2) Failure to develop and stick to their plan through thick or thin
3) Paying high investment costs for commissions, advisers, taxes
4) Overtrading
5) Chasing Performance
6) Blindly following others

These aren't myths to do with index investing. You could state that these are myths of dividend investing or any sort of investing. They aren't really specific to index investing and are probably more relevant to dividend investing than index investing.

Anyway - I think you'll find that index investing has a lot of advantages over dividend investing. It's simpler. It has greater diversification. With all the points you've listed above I think it comes out on top over dividend investing.

[Retire-Canada]

What do the mods think about blatant "come and look at my site" posts ?

https://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/

5/21/14 Edit:
"Spam" in rule number 5 ("No spam.") includes linking to your own blog.  You may add a link to your blog in your signature, and it will show up under every post you make.  Please do not start a new thread just to link to a post you wrote.  If the content is good enough, others will do that for you.  If your blog post is relevant to another thread that is ongoing, feel free to add the link, but do not abuse this - if too many of your posts are direct links to your own content, that is spammy.  Enforcement will be at the moderators' sole discretion.  If you are not sure, please contact a moderator before posting.

[Proud Foot]

DGI, I started typing out a response to your article but then decided against posting it as some of your points against these myths were merely semantics and others were unrelated to the act of investing in indexes.

Like you, I have taken time to research stocks and have developed a collection of dividend stocks as small part of my overall portfolio.  From inception to now they have outperformed my index investments but it definitely took some work to determine which stocks to buy.

Completely agree with your 6 reasons for investor failure and most of those deal with investor behaviors rather than actual investments. 

Your last sentence before the conclusion:

As a rule, I am worried when a group of investors piling on one-decision stocks or portfolios, without giving it much though.

For someone who does not want to give much thought to their investments, the best investment they could make would be a target date fund (typically holding index funds) followed by total stock index fund.

[Dividend Growth Investor]

It is ironic how you have failed to prove your counterpoints with actual data, and actually used the same types of arguments that you are accusing me of making.

And just because you disagree with someone, that doesn't mean any of their claims are baseless.

Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true.

How do you know that? Doesn't really matter, but a broad, baseless claim isn't the best way to start an article meant to 'fix' misconceptions about 'myths' and 'magical' thinking.

"-The chief reasons for investor failures includes:- ..."

None of those 6 points are myths about index investing -the 'subject' of this thread. And none are problems specifically inherent in index investing. But I see the article itself has that list...

1) Indexing is passive investing.

You claim it 'isn't', but yeah, it pretty much is. The typical recommendation (certainly here at the least) would be to open a fund in the Total Stock Market or 500 Index (which are fairly close to identical results), and just consistently add savings to it. That's an extremely passive approach to investing. The details you note about how the fund changes holdings over time, etc. don't matter. It can still be highly passive for the actual investor auto-funding it every month.

"-In contrast, a dividend investor can build a diversified portfolio of individual dividend stocks,-"

Yeah. And in contrast, that's not passive at all. You have to actively research, pick and choose whatever that ends up being. 'Actively' picking the broad market index is as passive as you can get (beyond doing nothing at all and hoping someone just gives you money).

"-and just hold on to it through thick or thin, without paying any costs or having much forced turnover.-"

At that point, it's essentially as passive as an index. But what if one of your stocks goes private? Or goes under? Or has a merger? It's not like you now control everything because it's not an index.

"-This is a much better form of passive investing, which has worked in the case of the Corporate Leaders Trust, or in the case of the millionaire dividend investor Ronald Read.-"

This a lousy argument. You simply state 'it's much better' for no actual reason. Then you site some group and a random millionaire as your 'authority'. I can counter this claim the same way by noting BILLIONAIRE W. Buffet's advice that almost everyone should be an index investor. Now, if I wanted to make a 'real' argument, I'd note his decade long bet that he's about to win and how most investors can't correctly guess what to invest in to beat the broad (index) market.

2) Index investors do better than other investors.
"-There is no data to support this claim.-"

It's been well established and there are tons of articles noting that active investors can't consistently beat the market. If anything, you're just being kinda 'shifty' here because you can say you don't know that actual index investors win. But that would only be because they just do stupid things they were commonly told not to do. It's a weak argument to blame the index.

"-The only real reason that index funds have done better than mutual funds is because they have lower costs and lower turnover rates than other regular mutual funds.-"

That isn't the only reason. But it is a reason, which is enough to give a point to Index investing for that fact alone.

"-It is pretty simple to identify a number of companies to include in a portfolio, and then set it and forget it. It is as simple as identifying 15 – 20 index funds to include in your portfolio.-"

Totally baseless claims. And where do you ever see (much less 'typically') people recommend someone pick 15-20 Index funds??? I've never seen that ever in my entire life. That's a total Straw Man.

"-my dividend portfolio has done better for me than any index fund portfolio I could have selected had I gone strictly to the indexing route.-"

One more unproven claim. Those really suck. Stop doing it.

"-However, I will never be so arrogant as to tell you that my portfolio is better than yours.-"

That wouldn't be 'arrogance', it would be 'delusional imagination' because you obviously just don't know what everyone else's portfolio is. That should go without saying, but you say it like you're being humble about it? It's really weird.

3) You do not need to save as much with index investing
"-many novice index investors believe that they need to save less than anyone else. As I mentioned in the myth above, investors do not know their future returns in advance.-"

Again... 'many' used as a 'weasel word'. You don't actually know how many people think they need to 'save less' because they're in Indexes. That's a complete fabrication. And I don't know that anyone thinks they know their future returns in advance. I certainly have never seen anyone ever post that they did. And if they had, I'm sure the very next poster would inform them that they're wrong.

"-In fact, there was one former dividend investor who prides themselves on spending too much money.-"

These sort of detail-free anecdotes are just awful. Please learn to fill in the blanks if you want to use specific examples in defense of your claimed wisdom. Also, if it was a 'former' investor, then it would be 'prided' not 'prides'. You write 'abandoned' and then 'they expect' rather than 'expected'.
Mixing up past and present just makes it look even more like pure fabrication.

Also, one person who did anything doesn't make any sort of a case for you. The point of that paragraph was a complete mess.

4) I will stick to Index investing through thick or thin

This is not a 'myth' of index investing. It's just frequently sited advice. It's great advice, so I see no reason to knock it or call it a 'myth'. Just because people can fail to follow it is not the Indexes fault. And how does this same idea not hit dividend stock pickers who have typically far less stocks than the hundreds or thousands in major index funds? Getting scared when one of a handful of stocks looks bad ought to be a stronger urge than when an Index fund has an occasional drop. The volatility ought to look far smoother in the Index fund, which tends to chill people out.

"-The funniest myth I have heard, comes from individuals who claim that they will stock to their active selection of index funds no matter what.-"

Ought to fix that typo-o. And 'claims' aren't myths. You should fix this whole article to reflect that fact. And 'active selection' is a goofy phrase here. If people initially select a few major index funds, keep them and don't swap them for others at random (and I think that's what typically happens), you can't call that 'active selection' except for the initial selection of someone asset allocation.

Do you think many, or most, index investors switch to different indexes when there's a drop or crash? I've never heard of that happening, much less, being common. I can see people getting scared and pulling out of an index in a crash (against common advice), but that rarely changes the index funds they're actually in. You seem to imply things that no one really does. Again, a very Straw Man attack.

"-Most people who today swear by indexing have only been doing it during a recent bull market.-"

Completely baseless claim. Just like you have no proof, I also can't prove it's not true, but I know it's not true of myself, and I think it's more likely that I'm not magically unique when so many here have made similar disclosures.

"-For whatever reason, I did not hear about the simplicity of index funds from anyone during the 2008 – 2012 period, where their past performance was abysmal.-"

Selective blindness, probably. Also, we've been in a bull market since the bottom of the crash in 2009. That's most of the 2008-2012 timeframe you listed. You seem totally confused. Your claim of 'past performance was abysmal' is nonsensical, too. My Index funds dropped BIG in 2008-9. I tried to put more money in, but basically, I just left it alone and got all my money back and more. Lots of people did. And ALL of them would've if they followed the 'just stick with it' advice that comes with most Index investing recommendations.

"-This showcases the fact that index investors essentially continue their habits of chasing what it hot today, after it has gone up.-"

This showcases nothing. It's simply your imagination. That's not what 'fact' means. And if anything, they'd be chasing a 'hot' market rather than a 'hot' company -which is still the safer, smarter, lesser of two evils.

"-I am just hopeful that they won’t end up “changing their asset allocation to become more conservative”, if their selection of index funds starts going down.-"

Following common advice (once again), investors would rebalance from bonds into stock funds. That would make their portfolio less conservative than before the rebalance, and long-term, keep the portfolio at exactly the same level of moderation.

It's one of the few minor things an otherwise very passive investor is asked to do.

"-Many index investors continue timing the market, constantly buying and selling investments,-"

You definitely aren't talking to the people on this forum.

5) You do not need to worry about anything with index investing

Who do you think actually believes this?? You seem to be aiming at the dumbest people you can find.
Most of this section has you going on about valuations. You seem to be arguing then that you can beat indexes by going for undervalued P/E's with big dividends? But it all ends up being implications the reader needs to interpret. Even if someone wanted to blindly follow you, there's nothing there to follow.

If you're going to go off on how most Indexers are doing it all wrong and following your imaginary myths, you ought to tell them how to do it right (and risk people tearing your strategies apart).
Otherwise, it just looks like you're trying to make yourself sound like an investing master, but with no proof at all that you even know what you're doing.

Here's the bottom line... if it's SO EASY to pick 15-20 stocks that are big winners that you can 'set and forget', then just TELL US what stocks you picked so we can all copy you! Why's THAT list not included??

[frugledoc]

DGI = Mr Percentage?

[Retire-Canada]

DGI = Mr Percentage?

Mr.% wasn't that spammy and he was usually more drunk, but who knows maybe he's a changed man.

[Scortius]

It is ironic how you have failed to prove your counterpoints with actual data, and actually used the same types of arguments that you are accusing me of making.

And just because you disagree with someone, that doesn't mean any of their claims are baseless.

Those who propose bold claims must supply bold evidence.

You have made quite a few strong claims in your article, thus you should be the one to support those claims.  The converse is not true, your readers are under no obligation to believe you and we can and will dismiss any claims you make that lack the proper evidence.

[NoStacheOhio]

What do the mods think about blatant "come and look at my site" posts ?

https://forum.mrmoneymustache.com/forum-information-faqs/forum-rules/

5/21/14 Edit:
"Spam" in rule number 5 ("No spam.") includes linking to your own blog.  You may add a link to your blog in your signature, and it will show up under every post you make.  Please do not start a new thread just to link to a post you wrote.  If the content is good enough, others will do that for you.  If your blog post is relevant to another thread that is ongoing, feel free to add the link, but do not abuse this - if too many of your posts are direct links to your own content, that is spammy.  Enforcement will be at the moderators' sole discretion.  If you are not sure, please contact a moderator before posting.

I reported the post before it had any replies, so they're apparently OK with it.

[prognastat]

It is ironic how you have failed to prove your counterpoints with actual data, and actually used the same types of arguments that you are accusing me of making.

And just because you disagree with someone, that doesn't mean any of their claims are baseless.

Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true.

How do you know that? Doesn't really matter, but a broad, baseless claim isn't the best way to start an article meant to 'fix' misconceptions about 'myths' and 'magical' thinking.

"-The chief reasons for investor failures includes:- ..."

None of those 6 points are myths about index investing -the 'subject' of this thread. And none are problems specifically inherent in index investing. But I see the article itself has that list...

1) Indexing is passive investing.

You claim it 'isn't', but yeah, it pretty much is. The typical recommendation (certainly here at the least) would be to open a fund in the Total Stock Market or 500 Index (which are fairly close to identical results), and just consistently add savings to it. That's an extremely passive approach to investing. The details you note about how the fund changes holdings over time, etc. don't matter. It can still be highly passive for the actual investor auto-funding it every month.

"-In contrast, a dividend investor can build a diversified portfolio of individual dividend stocks,-"

Yeah. And in contrast, that's not passive at all. You have to actively research, pick and choose whatever that ends up being. 'Actively' picking the broad market index is as passive as you can get (beyond doing nothing at all and hoping someone just gives you money).

"-and just hold on to it through thick or thin, without paying any costs or having much forced turnover.-"

At that point, it's essentially as passive as an index. But what if one of your stocks goes private? Or goes under? Or has a merger? It's not like you now control everything because it's not an index.

"-This is a much better form of passive investing, which has worked in the case of the Corporate Leaders Trust, or in the case of the millionaire dividend investor Ronald Read.-"

This a lousy argument. You simply state 'it's much better' for no actual reason. Then you site some group and a random millionaire as your 'authority'. I can counter this claim the same way by noting BILLIONAIRE W. Buffet's advice that almost everyone should be an index investor. Now, if I wanted to make a 'real' argument, I'd note his decade long bet that he's about to win and how most investors can't correctly guess what to invest in to beat the broad (index) market.

2) Index investors do better than other investors.
"-There is no data to support this claim.-"

It's been well established and there are tons of articles noting that active investors can't consistently beat the market. If anything, you're just being kinda 'shifty' here because you can say you don't know that actual index investors win. But that would only be because they just do stupid things they were commonly told not to do. It's a weak argument to blame the index.

"-The only real reason that index funds have done better than mutual funds is because they have lower costs and lower turnover rates than other regular mutual funds.-"

That isn't the only reason. But it is a reason, which is enough to give a point to Index investing for that fact alone.

"-It is pretty simple to identify a number of companies to include in a portfolio, and then set it and forget it. It is as simple as identifying 15 – 20 index funds to include in your portfolio.-"

Totally baseless claims. And where do you ever see (much less 'typically') people recommend someone pick 15-20 Index funds??? I've never seen that ever in my entire life. That's a total Straw Man.

"-my dividend portfolio has done better for me than any index fund portfolio I could have selected had I gone strictly to the indexing route.-"

One more unproven claim. Those really suck. Stop doing it.

"-However, I will never be so arrogant as to tell you that my portfolio is better than yours.-"

That wouldn't be 'arrogance', it would be 'delusional imagination' because you obviously just don't know what everyone else's portfolio is. That should go without saying, but you say it like you're being humble about it? It's really weird.

3) You do not need to save as much with index investing
"-many novice index investors believe that they need to save less than anyone else. As I mentioned in the myth above, investors do not know their future returns in advance.-"

Again... 'many' used as a 'weasel word'. You don't actually know how many people think they need to 'save less' because they're in Indexes. That's a complete fabrication. And I don't know that anyone thinks they know their future returns in advance. I certainly have never seen anyone ever post that they did. And if they had, I'm sure the very next poster would inform them that they're wrong.

"-In fact, there was one former dividend investor who prides themselves on spending too much money.-"

These sort of detail-free anecdotes are just awful. Please learn to fill in the blanks if you want to use specific examples in defense of your claimed wisdom. Also, if it was a 'former' investor, then it would be 'prided' not 'prides'. You write 'abandoned' and then 'they expect' rather than 'expected'.
Mixing up past and present just makes it look even more like pure fabrication.

Also, one person who did anything doesn't make any sort of a case for you. The point of that paragraph was a complete mess.

4) I will stick to Index investing through thick or thin

This is not a 'myth' of index investing. It's just frequently sited advice. It's great advice, so I see no reason to knock it or call it a 'myth'. Just because people can fail to follow it is not the Indexes fault. And how does this same idea not hit dividend stock pickers who have typically far less stocks than the hundreds or thousands in major index funds? Getting scared when one of a handful of stocks looks bad ought to be a stronger urge than when an Index fund has an occasional drop. The volatility ought to look far smoother in the Index fund, which tends to chill people out.

"-The funniest myth I have heard, comes from individuals who claim that they will stock to their active selection of index funds no matter what.-"

Ought to fix that typo-o. And 'claims' aren't myths. You should fix this whole article to reflect that fact. And 'active selection' is a goofy phrase here. If people initially select a few major index funds, keep them and don't swap them for others at random (and I think that's what typically happens), you can't call that 'active selection' except for the initial selection of someone asset allocation.

Do you think many, or most, index investors switch to different indexes when there's a drop or crash? I've never heard of that happening, much less, being common. I can see people getting scared and pulling out of an index in a crash (against common advice), but that rarely changes the index funds they're actually in. You seem to imply things that no one really does. Again, a very Straw Man attack.

"-Most people who today swear by indexing have only been doing it during a recent bull market.-"

Completely baseless claim. Just like you have no proof, I also can't prove it's not true, but I know it's not true of myself, and I think it's more likely that I'm not magically unique when so many here have made similar disclosures.

"-For whatever reason, I did not hear about the simplicity of index funds from anyone during the 2008 – 2012 period, where their past performance was abysmal.-"

Selective blindness, probably. Also, we've been in a bull market since the bottom of the crash in 2009. That's most of the 2008-2012 timeframe you listed. You seem totally confused. Your claim of 'past performance was abysmal' is nonsensical, too. My Index funds dropped BIG in 2008-9. I tried to put more money in, but basically, I just left it alone and got all my money back and more. Lots of people did. And ALL of them would've if they followed the 'just stick with it' advice that comes with most Index investing recommendations.

"-This showcases the fact that index investors essentially continue their habits of chasing what it hot today, after it has gone up.-"

This showcases nothing. It's simply your imagination. That's not what 'fact' means. And if anything, they'd be chasing a 'hot' market rather than a 'hot' company -which is still the safer, smarter, lesser of two evils.

"-I am just hopeful that they won’t end up “changing their asset allocation to become more conservative”, if their selection of index funds starts going down.-"

Following common advice (once again), investors would rebalance from bonds into stock funds. That would make their portfolio less conservative than before the rebalance, and long-term, keep the portfolio at exactly the same level of moderation.

It's one of the few minor things an otherwise very passive investor is asked to do.

"-Many index investors continue timing the market, constantly buying and selling investments,-"

You definitely aren't talking to the people on this forum.

5) You do not need to worry about anything with index investing

Who do you think actually believes this?? You seem to be aiming at the dumbest people you can find.
Most of this section has you going on about valuations. You seem to be arguing then that you can beat indexes by going for undervalued P/E's with big dividends? But it all ends up being implications the reader needs to interpret. Even if someone wanted to blindly follow you, there's nothing there to follow.

If you're going to go off on how most Indexers are doing it all wrong and following your imaginary myths, you ought to tell them how to do it right (and risk people tearing your strategies apart).
Otherwise, it just looks like you're trying to make yourself sound like an investing master, but with no proof at all that you even know what you're doing.

Here's the bottom line... if it's SO EASY to pick 15-20 stocks that are big winners that you can 'set and forget', then just TELL US what stocks you picked so we can all copy you! Why's THAT list not included??

Not addressing the concerns/criticisms is not a great start... being requested to prove/back up your claims in not a strange request.

[AdrianC]

Discussion of same article at Bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=213628

[FIRE4Science]

I wonder what happens to all that voting power that investors of index funds give up, which otherwise would have had a vote if bought actual shares? Board of directors making bargains with fund managers maybe to keep raising their compensations 10% yearly?

[Heroes821]

Discussion of same article at Bogleheads:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=213628

Thanks Adrian. I thought the facepunches here were brutal.  Those guys were way more mean.

[steveo]

I think the guy deserves some face punches. There was nothing at all rational in what he wrote.

From Bogleheads:- "Eh, it's hack writing. And the worst part about it is that every one of those mythical myths are more pronounced with the authors preferred approach."

I assume the article is trying to sell his idea that dividend investing is better than index investing but his points have nothing to do within index investing and are probably a lot more relevant to dividend investing.

[RangerOne]

I have to agree that the list doesn't make much sense and just kind of rambles. None of those statements can be attribute as something unique to indexing. It is simply a list of potential bad investment behavior which is an issue no matter what kind of investment vehicle you chose.

I will say that I have not read nearly enough about dividend based investing, and though I am interest in understanding the subject better, I see no reason to trust a blogger over the founder of Vanguard numerous books and decades of data proving his point about buy and hold index investing over the total market. I keep in mind that dividend aren't magic and that total market gains each year factor in dividend yields as well as the gains in actual company value. And also that dividend investing by its vary nature means that you are essentially hand picking only a very specific subset of companies and ignoring other portions of the US and international stock market that could increase our diversification.

Dividend investment strategies like any other probably have their place in a persons portfolio depending on the situation. I could imagine a retirement portfolio where a person may like to hold a large subset of high dividend stable companies as a means to generate reliable income, again I would need to read more about the strategies. But claiming that it is a path to riches and the index investors are misleading themselves is a bold and unsubstantiated claim.

The data surrounding indexing versus actively managed funds, when talking about equivalently well diversified equity and bond investments, historically demonstrates that lower fees and broad diversification found in buying a representation of the total market will over the long term out earn the vast majority of active funds.

It makes no guarantee that you can't find an active fund that wont do better over the next 30 years. But the data supports the claim that if you look at a 100 or so equally good active funds and a comparable index portfolio and track them over 10, 20 or even 30 years, as time passes the index will outperform more and more of those funds.

That evidence seems to demonstrate the simple fact that no one has yet discovered a means to craft an investment portfolio which can consistently beat the performance of the total market on an indefinite timescale. And in fact very few can even beat it over a 10 year time frame.

And in the process of trying to do just that active funds robs you of returns in the form of fees.

The only myth that it claims that is a commonly held belief surrounding indexes is that they are passive investments. Indexes are passive. The blogger is just playing with meaning of passive versus active management. The very definition of an index implies that its holdings will vary over time according to the indexing formula, that is a feature of this passively managed investment vehicle. It is passive because there is no "manager" hand picking funds based on a lengthy analysis. There is simply a set of rules or a formula that dictates which companies and what proportions get included in the index... as noted a committee that oversees the index, like the S&P 500 may make some final decisions about when to cut or add a particular company to the index but the point is that the resulting ability to deliver a product with low fees because the process of maintaining the fund is simplified and streamlined through the process of indexing is what leads us to consider it a "passively managed" fund....

Passive does not mean static, it is referring to differentiation from an active fund where a group of human managers regularly intervene to create an investment fund and charge you a fee for the work entailed.

[Livewell]

Here's the bottom line... if it's SO EASY to pick 15-20 stocks that are big winners that you can 'set and forget', then just TELL US what stocks you picked so we can all copy you! Why's THAT list not included??

No doubt that is included in the pay for section of the web site

[Hargrove]

I wonder what happens to all that voting power that investors of index funds give up, which otherwise would have had a vote if bought actual shares? Board of directors making bargains with fund managers maybe to keep raising their compensations 10% yearly?

That's one of the interesting speculations about index funds taking over the world, but it's actually the reverse, I think, that CEOs have to worry about. If only a handful of people are voting, the takeover of your company gets much easier, and your compensation is always at greater risk if your company leadership is less stable.

If Vanguard owns your company through VTI/VTSAX underlying purchases one day, and you do something shady, couldn't Vanguard just vote you right out, as an investor-owned company owning another company would be likely to do in its own best interest?

[steveo]

I wonder what happens to all that voting power that investors of index funds give up, which otherwise would have had a vote if bought actual shares? Board of directors making bargains with fund managers maybe to keep raising their compensations 10% yearly?

That's one of the interesting speculations about index funds taking over the world, but it's actually the reverse, I think, that CEOs have to worry about. If only a handful of people are voting, the takeover of your company gets much easier, and your compensation is always at greater risk if your company leadership is less stable.

If Vanguard owns your company through VTI/VTSAX underlying purchases one day, and you do something shady, couldn't Vanguard just vote you right out, as an investor-owned company owning another company would be likely to do in its own best interest?

It's an interesting point this. I can see another potential issue. I work for a large bank where the CEO and his staff and the board are extremely well paid. I like the CEO but there is no way he is worth what he is being paid. I think there is the potential for index funds to drive down executive pay ala index investing where the less you pay typically the better the results are.

[Gunny]

OP definitely picked the wrong blog to trash index investing and promote another blog.  He should have read through this blog before posting his piece on index funds.  It pays to know your audience. 

[NoStacheOhio]

If Vanguard owns your company through VTI/VTSAX underlying purchases one day, and you do something shady, couldn't Vanguard just vote you right out, as an investor-owned company owning another company would be likely to do in its own best interest?

That was my thought specifically regarding Vanguard. Being investor-owned, they're generally obligated to vote whatever is best for their shareholders. Given that they're so large, that could have some heavy influence on what happens within a company. They also have the expertise and personnel to actually comb over stuff and get a deeper understanding of what's going on versus an individual investor who may or may not be able to read between the lines on SEC filings or proxy forms.

[Dividend Growth Investor]

Hi Everybody,

I actually picked the right forum to post and I posted it on purpose. One of my favorite investing books is Bogles Common Sense on Mutual Funds. I also love Bogle on Mutual Funds. A lot of what I do and a lot of what I have written has been inspired by Bogle.  But it is also inspired by a lot of other things I have read. A lot of people disagree with me because they have had different experiences than me.  And they have not read what I have read ( or vice versa). I have talked to a lot of investors in the past - and having site about investing helps see things from a variety of perspectives. I found it suspect when someone stated that they should ignore my opinion but look at what Bogle has said. Several of things I have said have been essentially borrowed from Bogle. It is the interpretation of individuals who calls themselves index investors that is infuriating.

I am also inspired by The Intelligent Investor, where we have the quote that the investors chief enemy is him/her self. A lot of people were infuriated with this article, but it is little nothing more than telling you to stay the course. In fact, when people see something they disagree with, they will double down on their original thoughts. So in the process of trying to refute those myths, I am in effect teaching you to stay the course an avoid behavior problems.

I would request that everyone who posted here share ( and my responses included):

1)   How long have you been index investing - Me 10 years ( DGI also 10 years)
2)   What was your AA 10 years ago, vs today ( examples would be helpful) - My AA was SP 500, Russell 2000, EAFE - 80:10:10
3)   Why did you change your AA? Any behavior pitfalls you exhibited? - I switched jobs so I rolled it to another account, and then rolled it to another 401K.

I wrote this article, based on my experience of in online interactions. I have written about dividend investing for a decade, and I have read about investing for a little more than that.

I know that a lot of people may have disagreed not because the information is wrong or they can refute it, but because of what I call myself online ( Dividend Growth Investor).  The unfortunate reality for all of you is that none of those who disagree has provided evidence that they stuck with their asset allocation through thick or thin for a decade.  A lot of the people who disagree have opinions, but by disagreeing they are stating that their opinions are more important than mine. This is a lousy argument.  Also a lousy argument is engaging in personal attacks.

The point is that participants in every strategy are subject to behavior pitfalls, because they cannot stick to a strategy, or to an allocation. This is true for indexing, and for dividend investing as well. I personally had a conversation with an index investor, who denied the behavior aspect of investing and claimed that they can teach someone investing in an hour.

Unfortunately, you cannot teach someone investing in an hour, because of the behavior pitfalls. They were actually the one who told me that because I invest in dividend stocks, I should be saving more, implying that indexing will provide better returns and hence an index investor needs to save less.  ( I have been told that before as well)

This particular investor has frequently changed their asset allocations over time, which is evident from several thousand postings they have made online over the course of a decade. So if a highly visible index investor cannot stick to the same allocation over a period of ten years, how can a new investor do that? Plus, this investor has spoken about how some 150 portfolios that are better than others, which in itself is bs.  And some of these portfolios do include a large number of ETFs/funds. This investor started engaging in personal attacks against me on Twitter, ,which is why I blocked them. I seldom block others, except for when they attack me personally, rather than my ideas.

The reality of the matter is that I have invested in dividend growth stocks and index funds for the past decade. I view both methods of investing interchangeably. I actually try build my dividend portfolios using concepts similar to the world of indexing. An index is a portfolio of investments, selected by a committee using some sort of criteria. That’s it in a nutshell.

[Dividend Growth Investor]

I am going to try and summarize points as much as I can. I have probably missed something, so just let me know.

As far as first point I made, the point of selecting this fund over another is an active decision that will have an impact on your returns. This is just basic asset allocation. This is something that an index investor should have realized from the start. Of course, it is easier to blame others for lack of understanding, than try to understand something. It is also a normal knee jerk reaction to fight someone you disagree with, and seek comfort in the large masses that agree with you. Group think can be a dangerous endeavor, because people can start doing silly things such as stating that they didn't read the article they were commenting on or ignoring things said in the article that answer their objections and stating them anyways.

The fact that index investors rushed to decisions, rather than understanding that this is asset allocation is disturbing. Why are you choosing VTI over say the 3 fund portfolio or the 60/40 portfolio? Choosing to own VTI over VT ( or a VTI –VGTSX combo) is an active decision,  that will impact your returns. And over the past 10 – 15 - 20 years, the returns on the combo will be different due to what you pick.  Your decision to pick this fund over another will impact your returns. This is a fact. The widely quoted Bogle and Buffett are against owning international index funds. But many others disagree. What should you do -it is up to you but this decision will impact returns.

Also High turnover is very well correlated with lower returns.  There is a mutual fund I analyzed once, that churned the portfolio all the time, had high fees, and ended up losing all investor money after 50 years. You obviously want the opposite of this behavior. This is the Ameritor Security Trust - MOD EDIT: Spam link removed.

The opposite example of the Corp Leaders Trust is a good example of truly passive investing – you buy a set of companies and hold with minimal interaction.  It has done better than S&P 500 itself over time, because there is much less turnover for this diversified portfolio. The data on the original S&P 500 companies and the performance of that static portfolio relative to the active decisions of the S&P 500 index committee also shows that keeping things as passive as possible results in great performance. This is all research that is available for everyone. But it seems like everyone here ignores everything that doesn’t confirm their opinions. This is the wrong way to approach life.

Funny how people use Buffett to support their thesis. He has used the following analogy about indexing before:

“If my universe of business possibilities was limited, say, to private companies in Omaha, I would ... try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. “

2.
I have not found the data that proves that index investors can do better. I have heard the claim that index investors do better than everyone else, but no one has shown me the data.

I find it funny that the example of Corporate Leaders Trust was ignored, when it showed that a passive portfolio of blue chip stocks can deliver great results over time. The poster chose to ignore it to make their points. I can bet that a portfolio of 30 Dow Jones Companies, held static over time will deliver results similar to broad markets. Bogle talks about the Trust in one of his books. He also talks about a fund where you just buy 50 or so individual blue chip companies, and just hold it without any friction.

When I talked about Arrogance, I was talking about a certain blogger, who has posted an article titled how 150 portfolios are better than yours. There are several portfolios there with a large number of index funds – there are also several of the roboadvisors and so is a Global Asset Allocation fund that has something like 28 asset classes in it. At some point, the process of picking funds seems very similar to picking stocks.

When I was talking about dividend stocks I was saying that a dividend strategy like Dividend Aristocrats has done pretty well over the past decade relative to say S&P 500. But that doesn’t mean that it would do better than S&P 500 over the next 5 or 10 years for example. And I have no desire to sell you on a dividend strategy. The ten of your that went to my site will not really generate enough income for me.

3. Actually, I have been personally told by several investors that I need to save more, because of my method of investing and that it was bound to underperform. The unfortunate truth is that people read my name “Dividend Growth Investor”, and then they make assumptions about me that are not based in fact.

The other investor, I linked to an analysis of mine where a Canadian fellow, who sold all his dividend stocks and bought 2 index funds. I think he did the right choice, but one of his articles essentially reads he needs a 6% withdrawal rate. All research has stated that 4% has been sustainable for US. Source: Boomer and echo

4. I agree that people should stick to their allocation, but unfortunately I spend a lot of time in places where people gather online, and see others who question whether they should stick to an asset class that has done not too well over the past decade such as international or emerging. I also see people who decide to increase asset allocation to fixed income after a crash:

http://www.indextown.com/my-portfolio-asset-allocation/

I also provided a link to a bogleheads forum from late 2008, after stocks had already gone down, where a fellow was talking about selling stocks if they went down further.

There is an index investor called ROG, who recently sold some stock funds because the market was high. Now I like Justin a lot, but I considered this market timing.

I also consider it market timing when Rick Ferri stated all of a sudden that he is adding more international stocks i January 2015.

I also consider it market timing when White Coat Investor started adding to his fixed income exposure in 2007, while reducing equities.  On a side note, I had to block him on Twitter a few months ago, because he was trolling. After that he wrote a post on his site about our conversation, and coincidentally that was followed by another post on the merits of income investing. Go figure.

What I really meant in this point is that people bail out on their allocation due to external forces, rather than sticking to it through thick or thin. So if you deviate from your say 70% allocation to stocks, to a lower allocation when stocks drop, you have failed at your plan, even if that means you added to your bond index funds. Not all will do it of course, but based on my observations many will.

One of the reasons why people are infuriated with this article, is that they cannot really be refuted either or. The sad truth is that people feel threatened by the article, rather than embrace what it really talks about – the ability to stick to an allocation through thick or thin. This is the so called behavior gap. Vanguard calls it adviser alpha I believe – it has quantified the value of an adviser to something like 1.50%/year  But if someone sticks to their asset allocation, doesn’t trade around, doesn’t get scared away, does not try to time the market, or does not create “reasons” for timing the market,  I am totally fine with it. The problem is that human behavior of fear and greed will persist forever. Very few index investors stay with their asset allocations without changing them for behavior reasons. No, I am not referring to going from 25% bonds while working to a higher % of bonds, which is something that would have been expected at the beginning of the plan. I am talking about realizing the market is too high, and selling some stock funds or bailing out if the stock market is low.

There are people who engage in that behavior, so the correct action is to educate these people or help them. It is unfortunate that the readers here did not understand the behavioral angle, and instead got all defensive.

The 2008 – 2012 argument is about my personal experience. I have maintained DGI for roughly 10 years. I had people embracing DGI after having poor experience with indexing. Since 2015 however, I have had a lot of people telling me that I should be indexing instead. This is my observation. Even the data behind mutual fund flows exhibits the idea that a lot of investors are adding to index funds. Heck, Vanguard has 3 trillion now, 2/3rds of which invested in indexes.

5. This is my experience. I write from my experience point of view.

I did say how index investors can do well – just to set it and forget it. I said it at the end of the article for sure. I know it was a long article, but come on, if something I have said does not stick in your mind, then what right do you have to throw dirt at my work?

I also provided example with Corp Leaders Trust of how a passive portfolio has done in the past. This was ignored of course. In my response, I would say buy and hold of the 30 Dow Companies will do fine over time. There is no research required.

My new years resolution is to build a ghost ship portfolio, and see where it goes in a decade or two with no input from me.

[NoStacheOhio]

Stop conflating indexing with being stupid and making bad choices. Just stop.

Holding index funds does not automatically mean a person will panic and sell during a downturn any more than does holding actively managed funds.

Holding index funds does not automatically mean a person doesn't save enough. Most Americans do plenty of not-saving on their own, regardless of what their 401(k) offers. If they even know what it offers.

Simple backtesting will show how a buy-and-hold indexer will fare against any given strategy you like. Just plug in initial investments and whatever periodic contributions you want. If you want to make the argument that no index investor has ever weathered a downturn, crash, correction, whatever, then you're just setting up a straw man and there's no point in talking to you.

[Travis]

A lot of the people who disagree have opinions, but by disagreeing they are stating that their opinions are more important than mine. This is a lousy argument.  Also a lousy argument is engaging in personal attacks.

https://forum.mrmoneymustache.com/investor-alley/dividend-portfolio-vs-index-fund/msg599852/#msg599852-


From https://www.bogleheads.org/forum/viewtopic.php?f=10&t=213628

Eh, it's hack writing. And the worst part about it is that every one of those mythical myths are more pronounced with the authors preferred approach.

Interesting to see he published that. I recently had to block the author from my website due to multiple trolling comments. And that was after I blocked him on Twitter (only person I've ever blocked on Twitter). He seems to have a bone to pick with index fund investing. Glad to know it's not just me.

I don't even find his method of investing particularly bad. It is likely to work just fine if adequately funded. But his interpersonal interactions were less than ideal.

Apparently some folks have the same opinion of your interpersonal style.

Funny how people use Buffett to support their thesis. He has used the following analogy about indexing before:

“If my universe of business possibilities was limited, say, to private companies in Omaha, I would ... try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. “

IF his business possibilities were limited to Omaha. They're not. Not for him and not for anybody else. So why is that quote even relevant?

This is why people listen to Buffett on Indexing:

    “My advice to the trustee could not be more simple. Put 10% of the cash in short‐term government bonds and 90% in a very low‐cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, individuals—who employ high fee managers.”

He's mandated that his estate go into such a portfolio when he finally kicks over. It's simple. It works. And he's literally taking that belief to the grave.

[Eric]

The fact that index investors rushed to decisions, rather than understanding that this is asset allocation is disturbing. Why are you choosing VTI over say the 3 fund portfolio or the 60/40 portfolio? Choosing to own VTI over VT ( or a VTI –VGTSX combo) is an active decision,  that will impact your returns. And over the past 10 – 15 - 20 years, the returns on the combo will be different due to what you pick.  Your decision to pick this fund over another will impact your returns. This is a fact. The widely quoted Bogle and Buffett are against owning international index funds. But many others disagree. What should you do -it is up to you but this decision will impact returns.

[snip]

The opposite example of the Corp Leaders Trust is a good example of truly passive investing – you buy a set of companies and hold with minimal interaction. 

So choosing which index funds to invest in is an "active decision" and therefore not passive investing, but choosing which set of companies to buy and hold is somehow not an active decision and therefore truly passive investing?

Did you really type this seriously, without irony?  LOL


Most of your post isn't worth responding to, simply because you continue to conflate index investing with common investor mistakes that could happen regardless of strategy.  Your anecdotes and strawmen are simply poor arguments.

"I know this guy who indexed, and he sold at the bottom of the last crash, therefore index investing doesn't work."

[dandarc]

Posting to follow.  These "new forum member spams lousy blog post and can't take the criticism" threads are entertaining to me.

[prognastat]

I am also inspired by The Intelligent Investor, where we have the quote that the investors chief enemy is him/her self. A lot of people were infuriated with this article, but it is little nothing more than telling you to stay the course. In fact, when people see something they disagree with, they will double down on their original thoughts. So in the process of trying to refute those myths, I am in effect teaching you to stay the course an avoid behavior problems.

I would request that everyone who posted here share ( and my responses included):

1)   How long have you been index investing - Me 10 years ( DGI also 10 years)
2)   What was your AA 10 years ago, vs today ( examples would be helpful) - My AA was SP 500, Russell 2000, EAFE - 80:10:10
3)   Why did you change your AA? Any behavior pitfalls you exhibited? - I switched jobs so I rolled it to another account, and then rolled it to another 401K.

I know that a lot of people may have disagreed not because the information is wrong or they can refute it, but because of what I call myself online ( Dividend Growth Investor).  The unfortunate reality for all of you is that none of those who disagree has provided evidence that they stuck with their asset allocation through thick or thin for a decade.  A lot of the people who disagree have opinions, but by disagreeing they are stating that their opinions are more important than mine. This is a lousy argument.  Also a lousy argument is engaging in personal attacks.

Just stop. You wrote a blog post with little to no sourcing and simply posted a link to it in a place where the commonly held knowledge is that for the vast majority of people holding a simple diversified index fund that aims to replicate the market performance and holding steady is the best option.

You are making a claim saying hey guys I have a better way.

It is up to you to prove this, not up to the people here to prove that what they are doing is working.

Also when someone hangs the theme of their blog around a concept it kind of implies a likelihood for bias. Take MMM, his main themes are be badass, self sufficient wherever possible and be frugal so you can invest the more. He could change his stance on index investing if it turned out he was wrong and not lose much face since the core of his image is not investing in index funds. If his name was The Index Investor Extraodinaire I would be more suspicious in his ability to change his mind of he turned out to be wrong. I also assume that given his current image that he in some cases might go overboard with DIY or frugality to an extent I wouldn't follow, but I know about this bias.

[Mr Mark]

 I'll put the popcorn on...

Looks to me like our friend is a seeking alpha writer plugging his strategy advice for a buck. Badly.

[Kaspian]

Haha...  I like the "just stop," comments.  Unfortunately, all facts aside, your article does come across as disingenuous.  And it concludes with index investors will be fine if they stick to their original plan?  So will staunch dividend investors.  Hardcore index and dividend investors show the same investing personality hallmarks (high savings rate, DCA, etc.) and most studies show they end up at more or less the same place in the long run.  Index investing is simply much easier to do for the majority, so in that regard it is "passive".  I'd say stick to promoting the benefits/details of what you do instead of saying an orange is better than an apple.

[Proud Foot]

I am going to try and summarize points as much as I can. I have probably missed something, so just let me know.

As far as first point I made, the point of selecting this fund over another is an active decision that will have an impact on your returns. This is just basic asset allocation. This is something that an index investor should have realized from the start. Of course, it is easier to blame others for lack of understanding, than try to understand something. It is also a normal knee jerk reaction to fight someone you disagree with, and seek comfort in the large masses that agree with you. Group think can be a dangerous endeavor, because people can start doing silly things such as stating that they didn't read the article they were commenting on or ignoring things said in the article that answer their objections and stating them anyways.

The fact that index investors rushed to decisions, rather than understanding that this is asset allocation is disturbing. Why are you choosing VTI over say the 3 fund portfolio or the 60/40 portfolio? Choosing to own VTI over VT ( or a VTI –VGTSX combo) is an active decision,  that will impact your returns. And over the past 10 – 15 - 20 years, the returns on the combo will be different due to what you pick.  Your decision to pick this fund over another will impact your returns. This is a fact. The widely quoted Bogle and Buffett are against owning international index funds. But many others disagree. What should you do -it is up to you but this decision will impact returns.

Also High turnover is very well correlated with lower returns. ACTIVE INVESTING There is a mutual fund I analyzed once, that churned the portfolio all the time, had high fees, and ended up losing all investor money after 50 years. You obviously want the opposite of this behavior. This is the Ameritor Security Trust -http://www.dividendgrowthinvestor.com/2016/06/the-worst-mutual-fund-in-history.html VERY ACTIVE MUTUAL FUND

The opposite example of the Corp Leaders Trust is a good example of truly passive investing – you buy a set of companies and hold with minimal interaction.ACTIVE INVESTMENT BY YOUR DEFINITION ABOVE  It has done better than S&P 500 itself over time, because there is much less turnover for this diversified portfolio. The data on the original S&P 500 companies and the performance of that static portfolio relative to the active decisions of the S&P 500 index committee also shows that keeping things as passive as possible results in great performance. This is all research that is available for everyone. But it seems like everyone here ignores everything that doesn’t confirm their opinions. This is the wrong way to approach life.

Funny how people use Buffett to support their thesis. He has used the following analogy about indexing before:

“If my universe of business possibilities was limited, say, to private companies in Omaha, I would ... try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. “

I made a few comments above in red.  Also a few more here.

Passive Investing:

Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.

Active Investing:

Active investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions.

While, yes, you have to actively chose your asset allocation and the investments to makeup that allocation, index investing is not active investing. By your definition it appears that true passive investing means doing absolutely nothing and not investing in anything or saving any money.

re:bolded.  Because someone chooses to index does NOT mean they made a rushed decision and have not thought about their asset allocation.  Someone may look at their risk profile and decide that 100% equities is perfectly fine for them if invested in a Total Market Index.  Others may chose a three fund portfolio or some other portfolio allocation.

[MustacheAndaHalf]

DivGrowthInvest -
Over 85% of equity funds fell behind the S&P 500 as measured by SPIVA for the past 10 years:
https://us.spindices.com/documents/spiva/spiva-us-mid-year-2016.pdf
In other words, people do measure passive investing and it does beat active investing.

As others have said, when introducing a new idea it's incumbent on you to back it up with data.  "Active investing" and "passive investing" are well established terms.  "Active decision" is not - it's a phrase you invented.  Inventing ideas without data is not convincing.

[CorpRaider]

I mean, one can be an active asset allocator but use "passive" indexes in that they are simple attempts to reflect the average experience of investors in a particular asset class.  Pretty Sure Bernstein in The Intelligent Asset Allocator and David Swenson from Yale in all of his books discuss this concept. 

I do think "index investing" a la Bogle is more likely to make people be passive with respect to asset allocation bets and even more so saving them from making active bets within an asset class.  As Joel Greenblatt has said, if you pick an active manager you have twice as many chances to make poor, performance chasing decisions.  So the philosophy generally leads to less activity and transactional and behavioral costs. 

If someone just widely diversified among stocks or replicated the index with the function on interactive brokers and sat still for 30 years they would likely do fine/beat the index funds.  Your philosophy is basically the same thing but perhaps sacrificing some tax efficiency and risking some negative selection bias in order to minimize the potential negative impacts from poor behaviors (by focusing on the dividends you reduce some of the behavioral risks since prices move more).  Then again what would happen to your strategy in a world where tax rates on dividends went up to 50% and capital gains taxes stayed the same, leading everyone to stop growing or paying dividends and focus exclusively on buybacks for returns of capital?  Then you would have been better off indexing or focusing on other metrics designed to gain exposure to the quality factor or shareholder yield/value factor.  But the DGI focus probably does help provide a rough quality factor exposure and helps control the lizard brain impulses for many.

[RangerOne]

There is no need to refute any arguments made with evidence in favor of indexes, simply because you have not pointed anything out inherently wrong with indexing.

You have simply pointed out, without any statics on index investor specific behavior, that some people make investing mistakes. Choosing to use indexes does not make a person magically have a sound investment strategy.

Also someones analysis is not magically invalid because they have not proven they can follow a sound investment strategy. We can all agree on what a sound by and hold strategy entails regardless of whether we have all lived long enough to see it through thick and thin.

If you want to compare the advantages of a dividend strategy you need to compare apples to apples and there should be a lot of comparisons of historical returns simulating similar investments and strategies. Or at least refer to and summarize a study doing so.

Making baseless claims that index investors don't understand the basics of investing as a reason not to use indexes is kind of silly.

[JLee]

It is ironic how you have failed to prove your counterpoints with actual data, and actually used the same types of arguments that you are accusing me of making.

And just because you disagree with someone, that doesn't mean any of their claims are baseless.

https://yourlogicalfallacyis.com/tu-quoque

[thenextguy]

This was my favorite part of the article.

The only real reason that index funds have done better than mutual funds is because they have lower costs and lower turnover rates than other regular mutual funds.

This is it.

You didn't reach some profound conclusion. Not only is this something index investors are aware of, but it is precisely the reason index investors choose said strategy!

It's like saying: The only reason that team won the game is because they scored more points! If it weren't for that...