This type of advice is exactly what frightens me- Lets say you followed this advice 10 years ago and invested in Vanguard’s “Total Stock Market Index” – a common index fund. Guess what your return would be now, after TEN YEARS.

NEGATIVE 2.13% (https://personal.vanguard.com/us/funds/vanguard/core)

This means that if you had followed such advice and invested $100,000 in this index fund, after 10 years you would have $97,870.00.

If you had instead invested in a CD paying 2.5% interest (that’s probably not even keeping up with inflation) you would have $128,369.15 after 10 years. That is a HUGE difference.

Do you realize how incredibly BAD it is that a 10 year yield is NEGATIVE?? That’s unfathomably bad.

That’s reality.

The reality is also that we are in a deep recession and the future will most likely be bright. Going buy-and-hold in index funds right now might end up being a fantastic long-term investment. What do you know, you might not LOSE money after 10 years.

But seriously, Let’s PLEASE STOP making the claim that index funds “work” because that’s historically been the case. It hasn’t. Looking back, there’s a lot advice that sounded smart but was actually trash.

And if we’re giving advice to “passive investors” who are naturally risk-adverse, why don’t we try and explain that there are other investments besides equities – because, NEWS FLASH, equities aren’t low-risk, even if you’re completely diversified within the market – you’re still just purchasing ONE TYPE of asset.

Ever heard the phrase, “Don’t put all your eggs in one basket”?

Guess what – index funds are one basket.

It works.

I believe the argument for passive vs. active investment is over. For the vast majority, passive investing works better.

But that does not mean that one should just assume that’s all there is to the investing game.

As Eric correctly tells us, there are always going to be bear markets and it’s possible to incur large losses. Why would any intelligent person be willing to take that chance?

It’s a simple matter to use options to give the investor guaranteed protection that limits losses to any pre-defined amount (like an insurance policy deductible). To get this insurance at zero cost, the investor sacrifices the potential for a huge gain. Good profits are still possible, but they are limited.

No one who recommends passive investing gets into discussing the benefits of options. Why is that? It’s a huge omission in my opinion. Options reduce risk. And that works for passive investors.

Here’s my post on passive investing:
http://blog.mdwoptions.com/options_for_rookies/2009/05/is-passive-investing-the-road-to-wealth.html

Sounds like a good read.

Eric: I agree with you that diversification among asset classes is a prudent idea.

The narrative format of the book doesn’t lend itself to in-depth discussions of various asset allocation strategies. My hope was simply to show readers who are new to investing that there are sound, common sense reasons to expect a diversified portfolio of equities to earn worthwhile returns over extended periods. (That is, periods that can be measured in multiple decades.)

To “a conscience life”: I’d absolutely agree that it’s possible to beat the market by picking stocks. The very nature of the system is such that somebody has to outperform the market, given that there are also people underperforming it.

I’d just argue that there are very few advantages that individual investors have over institutional investors when it comes to hoping to be in the group that outperforms. Everything I’ve seen indicates that our chances for success are better with low cost index funds.

This is an interesting statement for two reasons.

First, the claim that beating the stock market has never been done. I submit that there have been certain people that have consistently beat the market (Magellan fund anyone?). And so the claim that it has not been done is false. Granted, I will accept that such examples are most likely due to luck — given enough people playing the stock market, one of them will eventually write Macbeth, or something like that. But the fact remains that it has been done. Just not on purpose.

Second, the claim that it is even *possible,* to pick the best stocks on purpose. This seems like a dubious claim — especially if you are also going to say that no one has done it (so how do you know that it *is* possible?). Perhaps in the short run it would be possible, but it seems likely that any such strategy would be immediately taken into account in the pricing of stocks, once it became widely known and the advantage would fall away. Yes, I realize that this is shades of “A random walk down wall street”.

I feel like it is most likely not even possible to ALWAYS beat the market, even with ‘ALL’ the information. But that is just my take. I just thought it was interesting that you would suggest it was possible. I would intrigued to learn why.

I hope this does not sound like an attack. I am genuinely curious, as it seem likely that you have thought about this.

I have a simple question:

Have those giving this “buy-and-hold” advice actually looked at the stock market recently? We had 12 years of supposed incredible growth wiped out in a total of 8 months.

Just because when we look back 25 years we see awesome growth, doesn’t mean the next 25 years will be that way. You need only look at the last 10 years to realize that.

I’m not trying to be pessimistic. I do believe the market will go up. But I think that equities (stock market investing) are not necessarily the sure investment they used to be and we shouldn’t put our faith solely in them. Just having a diversified portfolio in the stock market with some index fund is NOT diversified enough.

An investment after TEN years yielding NEGATIVE?? Are you kidding me? That’s so insanely bad I can’t believe people are still recommending the stock market at all, let alone a buy-and-hold strategy.

I think index funds are great, and well-managed funds are not to be discounted too much. But please, let’s stop claiming that the stock market is the only place to invest money. There are lots of good investments besides equities, and we need to make sure we diversify among them.

It seems that every personal finance “expert” just recommends buy-and-hold because historically that’s been okay (only if you ignore the last 8 months, of course), it’s simple and easy, and most don’t have a clue about investing anyway.