Author Topic: Indexing sucks  (Read 59488 times)

protostache

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Re: Indexing sucks
« Reply #50 on: May 09, 2016, 06:39:59 PM »
My opinion is that the defeatist attitude of labeling stock picking as likely to fail is unhelpful and condescending

I think that you're missing the reasoning behind the use of that label.  Statistically, you are less likely to succeed following a stock picking strategy.



That's not attempting to put down someone who wants to follow this strategy, it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager . . . who has access to the same information that they do.  It's a difficult game to win at consistently over long periods of time, and very few do.

It's not condescending to point out the reality of a suggested course of action.  It would be irresponsible not to do this.

Do you have a link to the report or data behind that chart?

thd7t

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Re: Indexing sucks
« Reply #51 on: May 09, 2016, 07:04:13 PM »
Wait, NO--Hold the fucking phone here!  "Survivorship bias" is used when things drop out over shorter terms and people analyze what is leftover as though it's the only thing which ever existed.  You're using it totally wrong--on randomly invented scenarios.  When speaking of the Empire State Building and its construction you don't say it has survivorship bias because it didn't get taken out by an earthquake but might some day.  I'm not lucky to be alive because of survival bias because I didn't get abducted by UFOs.  Used the way you guys are anything be classified as suffering from "survivorship bias". 

It's for things like if a bank is measuring its mutual funds saying they all went up over the last 3 years but they don't take into consideration that 4 of the 20 were actually completely canned over the same timespan.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.

Aphalite

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Re: Indexing sucks
« Reply #52 on: May 09, 2016, 07:49:22 PM »
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)

AlmstRtrd

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Re: Indexing sucks
« Reply #53 on: May 09, 2016, 08:42:13 PM »
If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

GuitarStv

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Re: Indexing sucks
« Reply #54 on: May 10, 2016, 06:31:54 AM »
My opinion is that the defeatist attitude of labeling stock picking as likely to fail is unhelpful and condescending

I think that you're missing the reasoning behind the use of that label.  Statistically, you are less likely to succeed following a stock picking strategy.



That's not attempting to put down someone who wants to follow this strategy, it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager . . . who has access to the same information that they do.  It's a difficult game to win at consistently over long periods of time, and very few do.

It's not condescending to point out the reality of a suggested course of action.  It would be irresponsible not to do this.

Do you have a link to the report or data behind that chart?

Sure:  http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking

It's specifically a chart showing how purchasing some of the stocks held in an index at random will nearly always under-perform the index, until you purchase enough of the stocks to roughly simulate the index.

protostache

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Re: Indexing sucks
« Reply #55 on: May 10, 2016, 07:01:25 AM »
Sure:  http://www.bloomberg.com/view/articles/2015-11-11/why-indexing-beats-stock-picking

It's specifically a chart showing how purchasing some of the stocks held in an index at random will nearly always under-perform the index, until you purchase enough of the stocks to roughly simulate the index.

(Here's the original paper in case anyone wants to read some math while drinking their morning coffee)

It's hard for me to give randomized models much credit, since they don't model actual investor behavior. Given a random subset of 500 randomly generated, randomly moving stocks, run it 10,000 times. Most of the time the random subsets don't include the very tiny number of significant outliers in their model so they lose over 5 year periods (an incredibly short time period, FWIW).

Do real life investors actually just pick completely randomly? More importantly, do the investors on this forum who advocate for picking individual equities pick randomly? I know I don't and I'm pretty sure Aphalite doesn't either (side note: trading something because Cramer says so is to be considered "random", IMO).

Picking better than random takes effort and research, absolutely. Nobody disputes that. If you don't put the work in you're going to have subpar results, and in my mind "picking random subsets" is not putting the work in.

Aphalite

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Re: Indexing sucks
« Reply #56 on: May 10, 2016, 07:03:49 AM »
(Here's the original paper in case anyone wants to read some math while drinking their morning coffee)

It's hard for me to give randomized models much credit, since they don't model actual investor behavior. Given a random subset of 500 randomly generated, randomly moving stocks, run it 10,000 times. Most of the time the random subsets don't include the very tiny number of significant outliers in their model so they lose over 5 year periods (an incredibly short time period, FWIW).

Do real life investors actually just pick completely randomly? More importantly, do the investors on this forum who advocate for picking individual equities pick randomly? I know I don't and I'm pretty sure Aphalite doesn't either (side note: trading something because Cramer says so is to be considered "random", IMO).

Picking better than random takes effort and research, absolutely. Nobody disputes that. If you don't put the work in you're going to have subpar results, and in my mind "picking random subsets" is not putting the work in.

+1

FIPurpose

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Re: Indexing sucks
« Reply #57 on: May 10, 2016, 10:20:22 AM »
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)

I understand what you are saying, but have a couple of differences of opinion on this:

1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

1. If you read the OP, the author is not talking about picking the next Apple. He is talking about picking companies that have maintained dividend payouts for decades, and have the ability to continue to do so. Also just because the OP does not mention an exit strategy does not mean he doesn't have one. I agree that every company eventually declines, but many can sustain healthy profits for decades. And those same companies don't just disappear over night. Walmart is not going anywhere, and any trouble that they may face can easily be abandoned early on. Most long-term dividend investors will bail if there are any headwinds in the dividend payout.

2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

You can easily operate cheaper in individual stocks. Comparing to a .06% expense ratios that equates to about 12 trades per $100,000 per year. Most buy-hold stock buyers are not coming anywhere close to that number. So yes they are likely doing it cheaper than Vanguard.

Aphalite

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Re: Indexing sucks
« Reply #58 on: May 10, 2016, 10:28:04 AM »
1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

I agree that it's not easy. As for your points:

1) You don't need to find the next apple to do really well, total market indices have a very small slice devoted to the apples and netflix and pricelines anyways - if you had one home depot, or starbucks, or walmart, in your portfolio, just one, it really drags up the rest of your portfolios. An example is the "dividend aristocrats" in 1989. While I would never invest based only on dividend records, the thought experiment turned out to be very interesting. Here's a post from almost a year ago:

Here's a quick and dirty calculation of $1000 investment per 1989 Dividend Aristocrat starting January 2, 1990 and ending December 31, 2014 - populated using:

Dividend Aristocrat list: http://www.suredividend.com/25-year-review-of-dividend-aristocrats-why-companies-fell-off-the-list/
Return calculation (dividend reinvested) - this could have errors, I haven't backtested, but seems to be pretty accurate: longrundata.com

For firms that were acquired or no longer exist, I assume total loss of principal, even though this isn't what actually happened:

Symbol   Return    Ending Value
K   8.41%    $7,543
PH   13.99%    $26,465
BAX   11.12%    $13,986
FPL/NEE   12.04%    $17,179
IFF   8.95%    $8,536
DOV   11.36%    $14,746
EMR   10.41%    $11,914
JNJ   13.58%    $24,179
KO   11.26%    $14,407
LOW   20.06%    $96,736
MMM   11.83%    $16,404
PG   12.34%    $18,376
CL   14.46%    $29,310
GPC   10.82%    $13,052
MAS   5.46%    $3,782
TMK   10.03%    $10,929
CSR   0.00%    $-   
HI   0.00%    $-   
RBD   0.00%    $-   
WLA   0.00%    $-   
AMP   0.00%    $-   
AHP   0.00%    $-   
LDG   0.00%    $-   
WIN   0.00%    $-   
TXU   0.00%    $-   
NSI   0.00%    $-   
Total    $26,000     $327,543
   11.13%   

You end up with $327.5k on a $26k investment (with Lowe's doing the heavy lifting) - I don't have the numbers for SP500/VTSAX going back to 1990, but 11.13% with assumed total principal loss on 10/26 holdings in the index would be acceptable to me

And keep in mind, total return would actually probably be much higher because you would have received cash on the companies in the list that were acquired or went private, such as CSR, HI, RBD, WLA, AMP, and TXU

I crossed out a section from the quote - VFINX from 1990 through 12/31/14 returned $246,859.48, for 9.42%. Even though you didn't have any "superstars" per se, one star (Lowe's) compounding at 20% a year for 25 years dragged your total portfolio return up to an index beating 11.13% (at the lower range of an estimate since we assume no recovery of capital from the companies that were acquired) even though 10/26 holdings were assumed to have gone "bankrupt". It's just the math of how portfolio returns work

I think your other point pertaining to takeovers and decline of companies has its heart in the right place, but again, in reality, this isn't what happens. Companies get acquired and you end up with the stock of the new company, or cash that you would redeploy. Joshua Kennon explains this with a lot more clarity than I am able to do so at this moment, so I'll direct you to his article: http://www.joshuakennon.com/im-building-ghost-ship-portfolio-someone-sort-index-fund-steroids/ as well as this comment by him:

"I'd bet money 25 years from now the DJIA bought and held with no changes that had AT&T a part of it would do better than the DJIA index fund. The academic evidence on this sort of thing always shows the same pattern and I'm not sure I'd want to bet against it but you'd be shocked how many people just don't understand the math.

I mean, look at this blog post (http://dailyreckoning.com/a-better-way-than-buy-and-hold/), which took me less than a few seconds to find. He argues against buy and hold investing because, "Of all of the stocks that were part of the original Dow Jones Industrial Average, only General Electric is still a part of the index." Only it's complete nonsense.

American Cotton Oil? Yeah, that's now part of Unilever, one of the most profitable, successful investments of the past century.

American Tobacco Company? Sweet Lord it ended up becoming Fortune Brands, one of the most successful spin-off and compounding enterprises in the history of human civilization. It went through so many reorganizations and spin-offs that you ended up owning everything from home security systems to Jim Beam whiskey.

Distilling & Cattle Feeding Company? Yeah, that ended up part of British giant Hanson PLC before being spun-off as an independent business with a name change, and then taken private.

Chicago Gas Company? That was aquired by Peoples Energy, which later merged in Integrys Energy Group, which was acquired last year by Wisconsin Energy Corporation.

General Electric? Still around plus a bunch of spin-offs.

Laclede Gas Company? The largest natural gas company in my home state of Missouri. It may be a boring utility but in my lifetime, it's compounded at just shy of 9% assuming no dividends reinvested.

United States Rubber Company ended up finding its way into French blue chip Michelin.

National Lead? It's complicated but it is one of those situations like Eastman Kodak where you didn't lose money despite horrific losses on the surface if your family held it as part of the original index. The company itself, which worked on the atomic bomb for the government and was known for its Dutch Boy paints, paid out dividends and spun-off its Baroid division, which is now part of Halliburton.

North American Company? That was broken up by the SEC, and permitted by the Supreme Court decision in 1946 thanks to the earlier-enacted PUHCA, shattering a public utility empire that was straight out of the gilded age; a sort of Standard Oil of electric companies operating an incredible network of subsidiaries that spanned the country.

Tennessee Coal, Iron, and Railroad Company found its way into U.S. Steel.

U.S. Leather Company has the distinction of being the only original Dow component that went into liquidation. It final reorganization involved a distribution of cash and a one-for-one share exchange for Keta Gas & Oil Corporation, which was subsequently abused by a scoundrel named Lowell Birell, who hid his misdeeds in the financial statements as a sort of front. So, yes, this one was largely a failure.

Historically, you did very well. Of course, everyone now ignores the huge portfolio of shares you inherit spanning multiple continents and currencies because ... face it ... people are lazy. They just want to pull up a quote and get a quick answer but that's not how the real world works."


2) The no new money part is true if you're not in the accumulation stage, but how many of the posters here have no cash streams coming in? Even the ones that are FI have rents or dividends pouring in. The owner of this website is generating 400k a year in ad/affiliate revenue!!! This is what I mean when I constantly say separate the vehicle from the underlying holdings. Even if all you own when you are FI is VTSAX/VTI or some other broad market index, you're getting cash streams from all of the underlying companies you are holdings. Same for a individual stock portfolio constructed carefully and rationally over 30 years. Even if you started with all small caps/fast growers that weren't paying a dividend, at some point, the ROI on new projects isn't as good for shareholders as return of capital via cash dividends or buybacks - you can see evidence of this with Apple by the way, they've run out of new projects to invest in so they've recently started paying dividends. Berkshire, when Warren passes, will most likely also institute some sort of capital return to shareholders.

Good comment, thanks for the discussion

Aphalite

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Re: Indexing sucks
« Reply #59 on: May 10, 2016, 10:34:05 AM »
I want to add that indexing tends to promote good behavior, low costs, and tax efficiency, which is actually the main ingredient to good investing returns. Morgan Housel's little illustration is pretty spot on for this:



Notice that security selection is near the very tip of the pyramid, meaning that if you get the behavior right, the asset allocation right, and keep your fees/transaction costs down, you will do just fine. It doesn't matter if your security selection comes from making your own judgments, or from using someone else's judgment (Vanguard funds, for example, pay licensing fees to SP500, CRSP, MSCI, etc. to use their allocations, no matter what, you're using a person's judgment, don't forget that)

k9

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Re: Indexing sucks
« Reply #60 on: May 10, 2016, 11:31:36 AM »
if indexing fails we have more to worry about than not making money. that would mean economic collapse and we should start stockpiling food and bullets
Lol. Economic growth or doom. There is no alternative.

Indexing can fail for (at least) two reasons :

  • economy stagnates; that happened a lot during the course of History, and people didn't call it a collapse nor did they run for bullets; Japan is the most obvious example
  • stock markets do OK but index fund companies fail to meet expectations; a company can go bankrupt for a bunch of reasons (shares lending at a bad moment or synthetic replication of indexes via swaps can have bad consequences, and fraud is always possible). Or the market can go crazy, fears indexes for no good reason and starts to keep far away from them. Indexers have to sell their shares at a discount. It sucks, sure, but it will only impact stock indexers, so the world will keep rolling.

Keith123

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Re: Indexing sucks
« Reply #61 on: May 10, 2016, 12:23:28 PM »
Exactly, try getting to you're FIRE number with that. 

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years.  This is inflation adjusted and dividends reinvested.  If my math is wrong, please correct me.  But if this is correct, the DCA accumulation period and final retirement with a 4% withdrawal rate expectation fails.  It doesn't always work like everyone seems to think it does.  Investors will need to adapt, even in retirement, as you cannot count on markets always going up over the long term, something everyone here seems to expect.  That's one of the issues I have a really hard time with, I don't have that expectation.  I think one needs to adapt to new investing environments and deploy new capital to the best potential investments they see available at the current time, not just the index all the time.  Maybe go 50/50 like Alphalite or something at least. 

1989   1000000
1990   544129
1991   487701
1992   331286
1993   323611
1994   311002
1995   278760
1996   220319
1997   134292
1998   84746
1999   96777
2000   32905
2001   
   





 
If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

Aphalite

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Re: Indexing sucks
« Reply #62 on: May 10, 2016, 12:42:18 PM »
If my math is wrong, please correct me. 

It's not wrong, but why are you ignoring all of the points posters have already laid out? Nikkei was at 78 PE, it's not a valid comparison to compare US today vs Japan then. A good comparison could be US in 1965 (and even then, valuations weren't at Japan bubble levels), Jeremy at GoCurryCracker wrote an article on this: http://www.gocurrycracker.com/the-worst-retirement-ever/

Valuations aren't that bad, relax

Kaspian

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Re: Indexing sucks
« Reply #63 on: May 10, 2016, 12:51:47 PM »
Wait, NO--Hold the fucking phone here!  "Survivorship bias" is used when things drop out over shorter terms and people analyze what is leftover as though it's the only thing which ever existed.  You're using it totally wrong--on randomly invented scenarios.  When speaking of the Empire State Building and its construction you don't say it has survivorship bias because it didn't get taken out by an earthquake but might some day.  I'm not lucky to be alive because of survival bias because I didn't get abducted by UFOs.  Used the way you guys are anything be classified as suffering from "survivorship bias". 

It's for things like if a bank is measuring its mutual funds saying they all went up over the last 3 years but they don't take into consideration that 4 of the 20 were actually completely canned over the same timespan.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.

No way, I did!  Because that's not at all what "survivorship bias" means.   If someone's going to talk about logical fallacies, trying to tell us the market's going to crash, then at least they'd better get their ideas straight.  The main point--the market and indexes will crash (because they haven't already) is logically unfounded.  There is no cognitive bias in ideas such as "gravity has always worked, therefore it will likely work tomorrow."  What happened to Japan's whole economy 20 years ago does not automatically up the probability of it happening in our lifetimes in the United States. 

If someone's going to bring up biases, fallacies, and logical argument terms--his whole side of the discussion is loaded to overflowing with them.  Correct me if I'm wrong:

  • Focusing effect — prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
  • Neglect of probability — the tendency to completely disregard probability when making a decision under uncertainty.
  • Attentional bias — neglect of relevant data when making judgments of a correlation or association.
  • Availability heuristic — a biased prediction, due to the tendency to focus on the most salient and emotionally-charged outcome.
  • Subadditivity effect — the tendency to judge probability of the whole to be less than the probabilities of the parts.

The issue I have with all this is some poor newb is gonna read this thread, think, "Oh, indexing doesn't work--so scratch that idea, " then run off and buy gold, Apple, real estate or some other crazy thing.

Telecaster

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Re: Indexing sucks
« Reply #64 on: May 10, 2016, 01:03:05 PM »
Exactly, try getting to you're FIRE number with that. 

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years. 

Not quite.  For one, as Alphalite points out the Nikkie was at a crazy, crazy valuation that is nothing like we are experiencing now, and secondly the  4% rule is based on 60/40 stocks and bond allocation.  While stocks were plummeting, bonds were doing great. 

I don't know how things would have shaken out, probably not great, but certainly better than your example.  I really think you are trying too hard to find doom and gloom where there really isn't any.   



 

FIPurpose

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Re: Indexing sucks
« Reply #65 on: May 10, 2016, 01:24:47 PM »
it's a statement of fact.  The person picking the stocks needs to be significantly better than the average active manager. It's a difficult game to win at consistently over long periods of time, and very few do.

Um, no, none of the three statements you stated are true.

1) It's not a statement of fact that you are likely to statistically underperform the index if you pick stocks. It is a statement of fact that if you incur UNNECESSARY EXPENSE, you are likely to underperform the index. You are getting stock picking and ACTIVELY MANAGED FUND picking confused. A lot of people have this misconception that just because you're a stock picker, you're automatically running up all these transaction costs and taxes, again, please separate the VEHICLE from the underlying holdings.

2) The person picking stocks doesn't need to be better at all than the active manager. In fact, if you perform as well as a manager before expenses, or as well as an index before expenses, you will likely perform better than them AFTER expenses. Again, you're making the god awful assumption that being a stock picker AUTOMATICALLY means more expenses when that couldn't be further from the truth - especially given the context in which Keith has posted in these forums (his stance is, use valuation based approach to pick stocks, then never sell)

3) It is definitely not a difficult game to win long term. If you mean that it's impossible to beat EVERY year, then yes, you would be right. But total performance? Over a long period of time? There's a ton of academic research showing buying a equal weighted portfolio of stocks, then doing literally nothing but reinvest into the original securities (letting winners ride and losers go to zero) outclasses index investing (see Jeremy Siegel's work)

I understand what you are saying, but have a couple of differences of opinion on this:

1. Buy and hold of individual stocks seems like suicide.  Companies go through a natural lifecycle where they have inception, growth, maturity, then decline.  It's very difficult to identify which stocks are going to become the next Apple during the inception phase so most of the time you will be selecting stocks that are well into growth / maturity phase.  And what will naturally happen is that some of these stocks will eventually be overtaken by a new company that does things better, will fall apart due to incompetence, or some kind of accounting scandal, lawsuit, etc.  Picking the index fund takes care of this for you as you aren't beholden to a single company and they get rid of the losers over time. 

2. If you are using the buy and hold strategy you won't have much new money to invest in startups / small caps which have a lot more growth left.  Your portfolio will age and decline.

Therefore, to keep up with new technology, individual stock pickers need to adjust their portfolio over time, and I have extreme doubt that anyone can operate cheaper than the Vanguard S&P 500 index fund.

1. If you read the OP, the author is not talking about picking the next Apple. He is talking about picking companies that have maintained dividend payouts for decades, and have the ability to continue to do so. Also just because the OP does not mention an exit strategy does not mean he doesn't have one. I agree that every company eventually declines, but many can sustain healthy profits for decades. And those same companies don't just disappear over night. Walmart is not going anywhere, and any trouble that they may face can easily be abandoned early on. Most long-term dividend investors will bail if there are any headwinds in the dividend payout.

2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

You can easily operate cheaper in individual stocks. Comparing to a .06% expense ratios that equates to about 12 trades per $100,000 per year. Most buy-hold stock buyers are not coming anywhere close to that number. So yes they are likely doing it cheaper than Vanguard.

1. Companies do disappear all the time - for every Walmart there is a Kodak.  And I strongly disagree that the typical investor can bail out before taking a huge loss if a company experiences a downturn.  You should be skeptical of companies that have smooth earnings and dividends growth throughout their existence - in certain cases this can be due to manipulating their financial statements for short term results - eventually this strategy could collapse.  And the average investor would not be able to fish that out by visiting the company, talking to management, and performing due diligence like Warren Buffett does.

Walmart is actually a pretty good example of what I'm talking about.  Although they are paying a high dividend, their stock price has not grown since the year 2000.  I'm sticking with the S&P 500 if I hope to have a 7% return to fund a 4% SWR.

2. Don't forget dividend reinvestment - Vanguard will do that for you for free where you will need to do it yourself and incur transaction costs in individual stocks.  Dividend reinvestment is great because you naturally will buy more shares when the price is low than you do when it's high.

1. No there is not a Kodak for every Walmart. (Obligatory kodak investment post: http://www.joshuakennon.com/eastman-kodak-example/) And I've attached a chart that shows Walmart's total return has been tracking pretty closely to VTSAX. It has been rough for a year or two but is quickly realigning. Plus Walmart would have provided a steady dividend income and stock value through both 2000-2002 and 2008-2009 (in fact it went up).

2. Vanguard and basically every other reputable broker does free stock reinvestment of dividends, so no there is no transactional cost here.

Keith123

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Re: Indexing sucks
« Reply #66 on: May 10, 2016, 01:35:17 PM »
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 

If my math is wrong, please correct me. 

It's not wrong, but why are you ignoring all of the points posters have already laid out? Nikkei was at 78 PE, it's not a valid comparison to compare US today vs Japan then. A good comparison could be US in 1965 (and even then, valuations weren't at Japan bubble levels), Jeremy at GoCurryCracker wrote an article on this: http://www.gocurrycracker.com/the-worst-retirement-ever/

Valuations aren't that bad, relax

doggyfizzle

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Re: Indexing sucks
« Reply #67 on: May 10, 2016, 01:38:26 PM »
2. I agree with this point. It is difficult to find high growth, dividend payers. There are a few out there, but they are a rare breed.

It isn't hard at all.  Literally just buy Altria.  Re-invest dividends.  Wait to retire.  Philip Morris produced common stock returns of 19% a year for 50 years.  Right now Altria (PM USA parent) is paying a 3.6% yield, sits on nearly $4b in cash, actually recorded shipment growth in its most recent quarter, and looks to benefit from converting its 27% interest in SABMiller into $2.5b pre-tax cash and an 11% stake in ABI/Miller.  The company prints money from a government-enforced monopoly industry.

Aphalite

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Re: Indexing sucks
« Reply #68 on: May 10, 2016, 01:45:24 PM »
That Kodak article was ridiculous.  He takes an arbitrary starting point and then makes decision to dump the stock with perfect hindsight.

Maybe you're not reading the article right? He let his Kodak shares go to zero, but Kodak had a chemical division that it spun off an gave to shareholders. This resulted in a 5.5% compounded return even as the main investment went to zero. This is what FI was trying to get at - when people think of Kodak, they think of total 100% loss, but in this case, instead of going from 100,000 to zero, the investment actually went from 100,000 to 425,000, from dividends and the spinoff

From the article: "Let me repeat the lesson: You cannot just look at stock charts to gauge the performance of your holdings.  Sometimes, you can walk away with more money even though your shares experience a 100% loss.  Wipeout losses are always bad – you should do everything you can do avoid them – but they are often not the entire story."

Retire-Canada

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Re: Indexing sucks
« Reply #69 on: May 10, 2016, 01:56:13 PM »
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.

Using historical data [cFIREsim] I get a 96.6% success rate for a 80/20 portfolio and a 4% WR. Keep in mind that assumes zero flexibility in spending or earning during FIRE.

If I use a 3.5% to 4.5% variable WR responding to market performance it averages out better than 4% overall with a 100% historical success rate.

Can the future be worse than the past sure, but it may also be better.

Tyson

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Re: Indexing sucks
« Reply #70 on: May 10, 2016, 02:04:38 PM »
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.

thd7t

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Re: Indexing sucks
« Reply #71 on: May 10, 2016, 02:20:18 PM »
Wait, NO--Hold the fucking phone here!  "Survivorship bias" is used when things drop out over shorter terms and people analyze what is leftover as though it's the only thing which ever existed.  You're using it totally wrong--on randomly invented scenarios.  When speaking of the Empire State Building and its construction you don't say it has survivorship bias because it didn't get taken out by an earthquake but might some day.  I'm not lucky to be alive because of survival bias because I didn't get abducted by UFOs.  Used the way you guys are anything be classified as suffering from "survivorship bias". 

It's for things like if a bank is measuring its mutual funds saying they all went up over the last 3 years but they don't take into consideration that 4 of the 20 were actually completely canned over the same timespan.
Well, Interest Compound addressed this pretty well , but contextually, if a claim of 100% is made, then a very broad interpretation of" survivorship " is valid. Further, we know that entire markets have crashed in history for reasons of natural disaster and lack of diversification. I admit that we are largely discussing the US market and that I disagree with Keith123's assertion, but putting the argument in terms of absolutes did it a disservice.

No way, I did!  Because that's not at all what "survivorship bias" means.   If someone's going to talk about logical fallacies, trying to tell us the market's going to crash, then at least they'd better get their ideas straight.  The main point--the market and indexes will crash (because they haven't already) is logically unfounded.  There is no cognitive bias in ideas such as "gravity has always worked, therefore it will likely work tomorrow."  What happened to Japan's whole economy 20 years ago does not automatically up the probability of it happening in our lifetimes in the United States. 

If someone's going to bring up biases, fallacies, and logical argument terms--his whole side of the discussion is loaded to overflowing with them.  Correct me if I'm wrong:

  • Focusing effect — prediction bias occurring when people place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome.
  • Neglect of probability — the tendency to completely disregard probability when making a decision under uncertainty.
  • Attentional bias — neglect of relevant data when making judgments of a correlation or association.
  • Availability heuristic — a biased prediction, due to the tendency to focus on the most salient and emotionally-charged outcome.
  • Subadditivity effect — the tendency to judge probability of the whole to be less than the probabilities of the parts.

The issue I have with all this is some poor newb is gonna read this thread, think, "Oh, indexing doesn't work--so scratch that idea, " then run off and buy gold, Apple, real estate or some other crazy thing.
We are miscommunicating, some. I didn't mean that you put this in terms of absolutes. I was referring to IC's argument, earlier. He had stated that buy and hold index investing will beat Keith123's strategy 100% of the time.  That was based on a misunderstanding of his strategy. I agree that indexing will beat Keith123's strategy most of the time, but not all of it.
Regarding your concern over new investors making poor decisions due to reading this thread, I absolutely see the concern. I am 100% in index funds.  I also strongly agree with the biases that you see in the evaluation that indexing will fail. I just want our arguments to be the clearest and most cogent.
« Last Edit: May 10, 2016, 02:23:59 PM by thd7t »

FIPurpose

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Re: Indexing sucks
« Reply #72 on: May 10, 2016, 03:02:34 PM »

Nice try, but you pretty much took the 2000 low for Walmart as your starting point, although I did the same thing as I was taking the 2000 high (Jan 1) :)

That Kodak article was ridiculous.  He takes an arbitrary starting point and then makes decision to dump the stock with perfect hindsight.

Nice catch, though I wasn't trying to be misleading. That's just the max lookback for the particular website I was using. (I think it's because that was the beginning of VTSAX?) Though there's more to glean than just the final number. Sure Walmart has recently gone down, but it's hasn't followed the over S&P trend. It provided a stable dividend even during the major downturns. Walmart is an extremely low volatility stock, with a consistent return, and owners can likely expect a 3-6% long-term return from it. Odds of it going out of business are extremely low, and it's a stock you'll be happy to own in down times. I'm not saying it makes a portfolio, but it definitely can be a good compliment in one.

Keith123

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Re: Indexing sucks
« Reply #73 on: May 10, 2016, 03:53:25 PM »
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today. 

steveo

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Re: Indexing sucks
« Reply #74 on: May 10, 2016, 03:57:51 PM »
if indexing fails we have more to worry about than not making money. that would mean economic collapse and we should start stockpiling food and bullets
Lol. Economic growth or doom. There is no alternative.

Indexing can fail for (at least) two reasons :

  • economy stagnates; that happened a lot during the course of History, and people didn't call it a collapse nor did they run for bullets; Japan is the most obvious example
  • stock markets do OK but index fund companies fail to meet expectations; a company can go bankrupt for a bunch of reasons (shares lending at a bad moment or synthetic replication of indexes via swaps can have bad consequences, and fraud is always possible). Or the market can go crazy, fears indexes for no good reason and starts to keep far away from them. Indexers have to sell their shares at a discount. It sucks, sure, but it will only impact stock indexers, so the world will keep rolling.

I don't believe that either of these options have anything to do with indexing.

If option 1 happens then the stock market is toast but so are your individual stocks.
I don't really understand option 2 because an index is owning the underlying stocks but just say you are correct. Typically you would still own the underlying stocks but I can't see this really happening. If the index was selling for $1 but the underlying stocks were worth $2 I think a lot of investors would be buying the index.

matchewed

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Re: Indexing sucks
« Reply #75 on: May 10, 2016, 04:00:04 PM »
Lots of people have crystal balls, not all are right. How do we know yours is? Or rather what makes yours more accurate?

Regardless, indexing is generally a long strategy, short events are minor bumps in the road.

frugledoc

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Re: Indexing sucks
« Reply #76 on: May 10, 2016, 04:04:39 PM »
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.

Why would a mustachian indexer be concerned about the market going down 20%?  That is what markets are meant to do and these moves don't make much difference over decades of investing. 

steveo

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Re: Indexing sucks
« Reply #77 on: May 10, 2016, 04:09:49 PM »
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 

Agreed. Let's get the facts right. There is no flawless system. Statistically the 4% rule though is pretty safe but it's also not what you are arguing. You aren't very consistent when it comes to the point that you are making.

You are stating that markets can crash and therefore indexing doesn't work but individual stock picking does work. This is an illogical statement. Your statement should be markets can crash and therefore investing into stocks doesn't work. The vehicle is not the issue here. If anything individual stocks leave you more open to a crash.

I think you need to work out what your argument or position is and then discuss that issue. Unless this is all a big troll.

steveo

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Re: Indexing sucks
« Reply #78 on: May 10, 2016, 04:11:43 PM »
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.

This is the whole point. Keith needs to re-think his argument because it doesn't make any rational sense. You can't discuss something like this because it's nonsensical.

thd7t

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Re: Indexing sucks
« Reply #79 on: May 10, 2016, 06:20:05 PM »
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.
Are you only afraid of a market correction? Ichan has to worry about that, because he's expected to anticipate market activity, but at the scale of the individual investor, it's just a bump to weather. Ichan isn't talking market stagnation.

aspiringnomad

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Re: Indexing sucks
« Reply #80 on: May 10, 2016, 09:58:01 PM »
http://fortune.com/2016/05/10/carl-icahn-crash-stock/

"In a recent filing with the SEC, Icahn Enterprises showed that the investor isn’t fooling around, announcing that it had a net short position of 149%.  That means that the value of Icahn’ s short positions—or financial assets that his funds have borrowed rather than bought—is worth 149% more than the value of his long positions."

"Icahn Enterprises CEO Keith Cozza underscored these views. “We’re much more concerned about the market going down 20% than we are it going up 20%,” he said."

Guess I'm not the only one who thinks things are more likely to go down than up.  Just thought it was funny that that story came out today.

Are you only afraid of a market correction? Ichan has to worry about that, because he's expected to anticipate market activity, but at the scale of the individual investor, it's just a bump to weather. Ichan isn't talking market stagnation.


Icahn being short makes me wonder if his supporting Trump isn't a strategic investment move. Kidding.

Anyway, I would agree with Keith on his point that past performance does not guarantee future results, and that's true even for the broad US stock market. As he or someone else pointed out, absent major government intervention in 2008, this point may be all too real. In the past, wars have actually boosted the US market. But it's hard to envision how the entire financial system collapsing would. But two major points of disagreement: 1) The concerns of today are nothing like the concerns of 2007-2008; and more importantly 2) Given the very low probability of complete disaster, the best calculated bet is always to invest. And as many here have argued, the best mode of investment for 99+% of the population is to index or otherwise diversify as much as possible.

MustacheAndaHalf

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Re: Indexing sucks
« Reply #81 on: May 11, 2016, 12:12:23 AM »
I plugged in $100 starting and $4 withdrawn per year into
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
I started in 1989 with $100 in US stock market, withdrawing $4 / year ("4% rule").

That simulation shows just over $900 when run to 2015 ($775 with inflation included in withdrawal).  Maybe others used a different portfolio than 100% US stock market?  I tried 60/40 and a mix of 30 US/30 intl/40 bond but still didn't crash that portfolio to $0 in portfoliovisualizer.

ecomic

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Re: Indexing sucks
« Reply #82 on: May 11, 2016, 03:09:04 AM »
Benchmarking can be used to cover a horrific management of a portfolio. I have heard many advisors tell their clients "Markets are not giving any returns nowadays" or "price adjustments, corrections, bearish trends, bla bla bla" If you can't make a profit then dont dare to invest other poeple's money. To beat the market it is not that complicated, taking into account that in those indexes there are Exelent companies, Average companies, Bad companies and Horrible companies. When investing in ETFs you take all of the package, so the horrible ones too.

It has never happened to me, I have never lost any of my clients money, simply because I only invest in what i am sure it is worth to invest. Stock picking takes time and big efford to succesfuly choose the right stocks, but indexing your results is quite easy to just follow the trends of the market. 

k9

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Re: Indexing sucks
« Reply #83 on: May 11, 2016, 03:14:56 AM »
Indexing can fail for (at least) two reasons :

  • economy stagnates; that happened a lot during the course of History, and people didn't call it a collapse nor did they run for bullets; Japan is the most obvious example
  • stock markets do OK but index fund companies fail to meet expectations; a company can go bankrupt for a bunch of reasons (shares lending at a bad moment or synthetic replication of indexes via swaps can have bad consequences, and fraud is always possible). Or the market can go crazy, fears indexes for no good reason and starts to keep far away from them. Indexers have to sell their shares at a discount. It sucks, sure, but it will only impact stock indexers, so the world will keep rolling.

I don't believe that either of these options have anything to do with indexing.

If option 1 happens then the stock market is toast but so are your individual stocks.
I don't really understand option 2 because an index is owning the underlying stocks but just say you are correct. Typically you would still own the underlying stocks but I can't see this really happening. If the index was selling for $1 but the underlying stocks were worth $2 I think a lot of investors would be buying the index.

For 1, you're right. I took "indexing won't fail" in the general sense, not in the sense "if the stock market as a whole doesn't fail, indexing won't".

For 2, it's a bit more complicated. In theory, the fund owns the stocks they are supposed to own. But most companies (at least iShares and Vanguard do it) do lend securities. That means there is a counterparty risk. If the counterparty fails to pay back the lended securities, that's a loss. This is a rare event, on a small part of the assets, so in general that's ok and the gains compensate for the losses. In a bad economic situation, though, the number of borrowers who fail to pay back securities can grow, leading to a sensible loss for the index company and to a loss of confidence from investors. You can then face a liquidity issue. The index is worth $2, but your share's net worth is now only $1.8 and, well, investors are being nervous (is the crisis over? Will it get worse?), so nobody actually wants to invest in it for the moment. So, you either have to wait or sell on a bargain (nervous investors won't buy $1.8 for $1.8, but they'll take the risk if they can pay only $1.6).

There are also synthetic index funds that are not actually invested in the stocks you think they are, but use derivatives to produce the same performance. It's cheaper, more efficient (you can track the index very closely) but counterparty risk is way higher. There are many such funds in Europe (most of them are synthetic), but they exist in the US, too (even Vanguard sells some).

As for bankrupcy, you are probably right, but beware. Fraud is always possible. Think MFGlobal. Vanguard seems to take these issues more seriously than others, though.

No need to be too nervous, though, but I wouldn't like to be invested only in one company's index fund.

Aphalite

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Re: Indexing sucks
« Reply #84 on: May 11, 2016, 05:14:47 AM »
I plugged in $100 starting and $4 withdrawn per year into
https://www.portfoliovisualizer.com/backtest-asset-class-allocation
I started in 1989 with $100 in US stock market, withdrawing $4 / year ("4% rule").

That simulation shows just over $900 when run to 2015 ($775 with inflation included in withdrawal).  Maybe others used a different portfolio than 100% US stock market?  I tried 60/40 and a mix of 30 US/30 intl/40 bond but still didn't crash that portfolio to $0 in portfoliovisualizer.

He was using Japan's market at  its peak in 1989

wienerdog

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Re: Indexing sucks
« Reply #85 on: May 11, 2016, 06:20:26 AM »
When I read this article last night, even though it is about asset allocation, the investor part made me think of this thread:

http://www.marketwatch.com/story/dont-be-the-victim-of-a-lackluster-stock-market-2016-05-10

"Our attitudes are actually extremely important assets: They shape our behavior almost automatically, while we aren't watching.

Some years back I asked my investment advisor colleagues to identify the most common attitudes they had observed among the best investors they knew. A handful of key attitudes emerged. Here are four:"


  • First, investors must trust the future enough to be willing to consistently do the right things even when the outcome is uncertain.
  • Second, every investor needs resilience, the ability to bounce back from the inevitable slings and arrows of the market – and of life itself, for that matter.
  • Third, successful investors need perspective, the ability to look beyond today's headlines, and recognize the difference between what's really important and what's not. Do you remember what was happening in the market exactly five years ago today? I don't either, and by now it really doesn't matter. That's perspective.
  • Fourth, investors need patience. The best investors know that time is their ally, and they can wait for results when that is necessary. Impatience is dangerous, often leading investors to do dumb things.



Mr. Green

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Re: Indexing sucks
« Reply #86 on: May 11, 2016, 07:31:42 AM »
I was more trying to illustrate that DCA indexing and the 4% rule are not some flawless system and that no one should count on this to work 100% of the time.  Markets don't always go up long-term and returns can be really bad for a long period of time even with dividends reinvested included.  This is an extreme example but it does the job. 
Do you live your life (literally) like you will die tomorrow? I suspect not because you likely wouldn't care about investing if you did. You don't live like that because you know that it is extremely unlikely that you will die tomorrow, unless you're 100 or something and then, sure, tomorrow could be your day. If you don't live your life like that, why would you invest like that, expecting a scenario that is such an outlier that it would be worse than anything we've ever experienced? I don't understand that. What a fearful way to live life! All history can give you is a rough guideline and there's only so much planning you can do.

cerat0n1a

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Re: Indexing sucks
« Reply #87 on: May 11, 2016, 08:40:23 AM »
He was using Japan's market at  its peak in 1989

It was an awesome response - a superb illustration of the power of regular investing/cost averaging into an index tracker. The Nikkei peaked at 38000 odd in 1989 on a PE of approaching 80. It was down at 8000odd in 2011 after the earthquake, its lowest value since 1982. Even if you pick that seriously bad time period and limit yourself to that one market rather than diversifying sensibly, you still get a pretty decent outcome.

Retire-Canada

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Re: Indexing sucks
« Reply #88 on: May 11, 2016, 08:43:29 AM »
What a fearful way to live life!

Agreed. But in the investing world fear is the equivalent sex in mainstream advertising. Draws in people like moths to a flame and makes them do crazy things.

Kaspian

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Re: Indexing sucks
« Reply #89 on: May 11, 2016, 09:38:55 AM »
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term.

This is the whole point. Keith needs to re-think his argument because it doesn't make any rational sense. You can't discuss something like this because it's nonsensical.

^^ +1 to this.  Saying the historically best game in town sucks because it will possibly fail at some point is, in my opinion, doing a great disservice to new investors and those who aren't sure exactly what they're doing.  (Especially considering the alternatives--not playing or trying your hand at some cockamamie other strategy.)  This sounds like the bad advice you'd get from a high-MER financial advisor.  It's good to think things through carefully, put them under a microscope, but smarter people than me have already analyzed index data at length and found it to be the best strategy for the average investor.  "Seatbelts might fail and have in some models, so rip them out of all the cars," is indeed nonsensical.

Interest Compound

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Re: Indexing sucks
« Reply #90 on: May 11, 2016, 10:15:30 AM »
If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

It beat US bonds.
It beat Total International Stocks.

Two of the three standard funds most commonly discussed here and at Bogleheads (the 3 Fund Portfolio), were beaten by 100% Japanese Stocks.

Interest Compound

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Re: Indexing sucks
« Reply #91 on: May 11, 2016, 10:27:06 AM »
Exactly, try getting to you're FIRE number with that. 

Keith. Really? Again, did you purposely skip over all the information that counters your line of thinking? I provided this information in the same post you're quoting:

"At that rate you'd need to work an extra 3 years compared to the market-weighted world stock market"

How about this:  You finally reach your number (let's use 1000000 to make it easy).  25 times your spending to follow the 4% safe withdrawal rule.  Assume you have DCAed into the Japanese market index to get there.  Great, you're finally ready to retire and plan to withdraw 4% (40000) yearly from here on out and live off of it.  If you retired in 1989 and withdrew 4% per year, I believe you would be flat broke by 2001 - 12 years.  This is inflation adjusted and dividends reinvested.  If my math is wrong, please correct me.  But if this is correct, the DCA accumulation period and final retirement with a 4% withdrawal rate expectation fails.  It doesn't always work like everyone seems to think it does.  Investors will need to adapt, even in retirement, as you cannot count on markets always going up over the long term, something everyone here seems to expect.  That's one of the issues I have a really hard time with, I don't have that expectation.  I think one needs to adapt to new investing environments and deploy new capital to the best potential investments they see available at the current time, not just the index all the time.  Maybe go 50/50 like Alphalite or something at least. 

1989   1000000
1990   544129
1991   487701
1992   331286
1993   323611
1994   311002
1995   278760
1996   220319
1997   134292
1998   84746
1999   96777
2000   32905
2001   
   





 
If you DCA'ed ¥1,000 a month into 100% Japanese stocks from 1989-2013, you'd end up with an inflation adjusted ¥360,717

Wait, that's total contributions of ¥300,000 with a real total return of only 20% over 25 years, correct? And that's with 2012 and 2013 being very good years for the Nikkei Index. Looks like a very poor performance to me but maybe it's too late and I should be sleeping instead of doing math.

No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:

Stop Worrying About The 4% Rule

Aphalite

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Re: Indexing sucks
« Reply #92 on: May 11, 2016, 10:58:05 AM »
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Interest Compound

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Re: Indexing sucks
« Reply #93 on: May 11, 2016, 11:09:49 AM »
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Agreed. I started to make a graph showing this, but all my data on Japan starts in 1989, so I couldn't :)

Good point to keep in mind.

Tyson

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Re: Indexing sucks
« Reply #94 on: May 11, 2016, 02:33:48 PM »
No one claims the 4% rule never fails. You don't need to point to Japan to see that, US stocks from 1929 and 1966 shared the same fate. Is it your claim Indexing sucks because the 4% rule can sometimes fail? If so, that's a logical discussion we can all participate in. I'd recommend checking this post:
Stop Worrying About The 4% Rule

His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

Telecaster

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Re: Indexing sucks
« Reply #95 on: May 11, 2016, 03:08:30 PM »
His argument is also counterproductive to any discussion based on reality - if you decided to stop working at 1929, 1966, or 1989 in Japan, you would have experienced the huge run up in the immediate preceding years leading up to it, which means that you would have had to work far less than you originally planned. Arguing one side to death while ignoring what happened immediately preceding it is dishonest, imo

Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

Not quite, but sort of.    The 4% rule assumes annual rebalancing.   So let's say stocks tank.  At the end of the year your portfolio is now overweighted in bonds, so as you take your withdrawal and rebalance, you will be selling a greater percentage of bonds, and presumably buying more stocks. 

Aphalite

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Re: Indexing sucks
« Reply #96 on: May 11, 2016, 03:15:55 PM »
Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

It just depends. Why are stocks tanking? Is it because interest rates are rising or is it because they were just overvalued? That matters in today's world of zero interest rates. If interest rates start rising quickly, BOTH stocks and bonds will take a beating. Rebalancing doesn't really do much for your portfolio if the factor that sends stocks into a tailspin results in correlation between your asset classes. Just as the 4% rule doesn't always work 100% of the time, asset allocation isn't a 100% chance magic bullet either. The reason people advocate for an IPS and a set allocation is, again, it helps you get your BEHAVIOR right, and that's the most important part, before security selection, asset allocation, and even fees. Someone that buys the lowest cost vanguard fund but doesn't have it in him/herself to stay the course when things get bad won't do better than someone who pays an advisor 2% overall but keeps his wits about him/her when volatility occurs - you see?

That said, as has been repeated ad nauseum, the market isn't really that overvalued. If you think it is, what is an acceptable alternative investment at the moment? I suppose cash is okay since inflation is near zero, but when will you pull the trigger again? The market can stay overvalued until the valuation burns off, and then you'll have missed all of the underlying compounding and dividends along the way. If you're adopting a behavioral approach where you add a little bit to your investments on a scheduled basis, you'll probably do okay since you will catch both overvaluation times as well as undervaluation times.

Tyson

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Re: Indexing sucks
« Reply #97 on: May 11, 2016, 04:28:05 PM »
Oh I'm 80/20 stocks/bonds and all VTSAX for the stocks I do own.  But I'm also in my accumulation phase and really couldn't care less what happens in the short or even the medium term.  That's my strategy and I'm sticking to it :)  But I haven't thought as much about what my strategy will be when I retire.  That's why I was asking about the 60/40 split for stocks/bonds for retiree's, specifically.  Sorry if that wasn't clear.

Keith123

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Re: Indexing sucks
« Reply #98 on: May 15, 2016, 12:46:35 PM »
Isn't this precisely why you do a 70/30 or 60/40 stock/bond allocation when you retire?  That way if the stocks tank, you can leave it alone and just draw down on your bonds until the stocks recover.

That said, as has been repeated ad nauseum, the market isn't really that overvalued.
For the S&P 500 index.  Goldman's conclusion: "The most likely future path of US equities involves a lower valuation."
« Last Edit: May 15, 2016, 12:59:59 PM by Keith123 »

SamFinn

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Re: Indexing sucks
« Reply #99 on: May 16, 2016, 01:47:27 AM »
I have yet to see anyone present an alternative to indexing that doesn't involve stock picking.  IMO, you as a person are much more likely to fail at stock picking than the entire US market is going to stagnate for the long term