The Time Cost of Investing: Does Obliviousness Pay Off?

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One aspect of buy-and-hold investing in low-cost index funds that has always attracted me is that there is an extremely low time cost. Once you have the initial investments in place, there is virtually no time cost at all. All you have to do is invest maybe half an hour a year rebalancing the investments – and that’s it.

That strategy pretty much matches the stock market. In fact, if you choose to just invest in the Vanguard 500, it almost exactly matches the ups and downs of the S&P 500 stock index.

Let’s look at the other side of the coin. Let’s say you’re following normal stock picking advice. You have a portfolio of 20 individual stocks (so that no piece of your portfolio is more than 5% of your total investment – diversification, after all). You devote an hour a week to studying each stock in detail, so you know what’s going on with that company. You also devote five hours a week to finding new, worthwhile companies to invest in, potentially replacing the slots in your portfolio.

You’re able to invest $10,000 a year – and we’re not worried about brokerage fees at all. What’s your earnings per hour doing all that research?

Let’s say all that work manages to beat the Vanguard 500 by 1% per year. Historically, VFINX has returned 9.56% per year since its inception (remember, that number includes dividends and stock price increases and decreases, and it does include 2008), so we’ll use that number as an annual return baseline.

Over a ten year period, VFINX would turn your $10,000 a year into a sum total of $170,968.66. Meanwhile, that portfolio that beats the S&P 500 by 1% would turn $10,000 a year into a sum total of $181,005.77. Your extra effort of 25 hours a week for ten years has earned you $10,037.11 during that period – an hourly wage of $0.77. Ouch.

“Come on!” you say. “Stocks are a long term investment!” So let’s look at the thirty year mark. Over a thirty year period, VFINX would turn your $10,000 a year into a sum total of $1,061,590.42. Similarly, your 1% better investment portfolio, with 25 hours a week over ten years invested in it, will turn that annual $10,000 into $1,347,885.59. Your extra effort of 25 hours a week for thirty years has earned you $286,295.18 – an hourly wage of $7.34. Congratulations, your investing expertise has earned you minimum wage.

“Come on!” you say. “I can do better than 1% over the S&P 500 every year for thirty years!” (Of course, if you actually believe that, I have a bridge to sell you.) So let’s make it 2% – you beat the S&P 500 by 2% every year for thirty years. Your extra effort for 25 hours a week for thirty years earns you an hourly wage of $16.60.

If you have the intellectual ability to do enough rigorous analysis to beat the market by 2% year in and year out, you can most certainly be earning more than $16.60 an hour with your time.

But what if you can invest more than $10,000 a year? If you’re in that group, where you’re able to invest significantly more than $10,000 a year in whatever you want and you’re sure you can beat the market consistently over the long haul, by all means, choose the route that’s right for you. However, I argue the statement above still holds – with those kinds of resources and intellectual acumen, you likely have better ways to earn money.

Here’s the take-home message: individual stock investing, done with adequate research, is a lot of work. Unless you have a very large amount to invest, the extra work is simply not worth it in terms of the extra income per hour.

Now, that’s not to say that you shouldn’t dabble in individual stock investing. I see nothing wrong with taking a sliver of your investments and playing the market, so to speak. However, recognize that such investments are largely a gamble unless you do adequate research. And, if you do adequate research, you have to blow away the overall market to make it worth your time.

My conclusion is simple. If you’re an individual investor without a ton of money to invest, it’s simply not worth your time to chase individual stocks. The time that’s required to adequately study individual stocks and build a truly diverse portfolio will make the gains small enough per hour of your work that you might as well do something else with your time, like build your skill set for your career, improve your health, or start your own side business.

Instead, just invest in a very broad index fund and ride the market at a low price with little time investment of your own. Better yet, do it with a balanced portfolio – don’t put it all into stocks, so that you can ride through the down markets with less worry and smaller losses.

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45 thoughts on “The Time Cost of Investing: Does Obliviousness Pay Off?

  1. I agree with your message although your example is pretty extreme – 25 hours of research a week? I don’t think too many full time analysts/portfolio managers put that kind of research time in.

    I think stock picking is more of a hobby – you need a pretty large portfolio to make it worthwhile (even if you can beat the market).

  2. I’m not sure you need an hour a week to monitor stocks you already own if you’ve done your research up front. Unless something major happens (most brokerages have alerts on securities you own) I would think just watching the quarterly reports for downward trends to be sufficient.

  3. If your knowledgeable enough to beat the S&P by 2% every year, then you should be working for Vanguard (or whoever) and managing a mutual fund yourself! LOL

  4. Agreed with Kevin. Once you’ve performed an analysis it doesn’t mathematically change unless you’ve got insider information or until the quarterlies come out. Now generally speaking, it would be important to keep abreast of economic news surrounding your stocks. But, if you’ve done the research and the investment makes analytical sense, along with having an established moat you shouldn’t be worried about how the stocks move in the short term unless its a drastic change that doesn’t follow the market.

  5. While I agree that not everyone can be a capable stock trader, I object to your assumptions in this post. You give the impression that successful stock traders’ hourly wage is low, which is hardly true. Consider that:

    1. Individual stock research overlaps.

    2. Stock researching improves with practice.

    3. Successful traders are often better at it than other things.

    4. Much research doesn’t use billable hours. Unless somebody pays you to take showers and walk on treadmills, stock analysis uses otherwise wasted time.

    5. Successful traders don’t diversify – they drill deep until they know a stock or a sector intimately. Buffet’s “swing for the fences” advice is true for us mere mortals as well.

  6. I wish my memory was good enough to remember the source, but I remember reading once that a good way to pick a stock is to just buy stock in a company with whom you particularly like doing business. Anyway, I personally have no income to invest but to satisfy my curiosity I did track how stocks I would have chosen did over a few years time. Had I taken that advice and put a sliver of my investment income into those vehicles, I would have made a return of just over 25% annually. This was for the years 1999 through 2004. I do not know how pertinent that may be to this discussion, but figured it never hurts to have a bit more data.

  7. “Successful traders don’t diversify – they drill deep until they know a stock or a sector intimately. Buffet’s “swing for the fences” advice is true for us mere mortals as well.”

    But it’s hugely risky. Very few people have an adequate financial foundation to be able to take their savings and actually swing for the fences. If you do, then you’re in that group that I describe above – the over $10K a year group.

    Individual stock investing works for people who (a) have a lot of resources or (b) have a lot of time. If you don’t have either, it’s basically gambling.

  8. I agree 95% of the population should stick to index funds when it comes to investing…they don’t have the time or desire to do the work necessary to pick good investments.

    My only critique is that 25 hours of research a week seems like a bit much to me. I have a portfolio of 10 stocks across diversified industries and read the annual and quarterly reports… listen to the conference calls and do additional research and it may add up to 7 hours a week.

    When it comes to the cost-benefit analysis of time spent vs higher return it’s probably not worth spending the extra time for the average person. But then again some people like myself enjoy researching and following individual companies… so it’s sort of a hobby.

  9. 25 hours a week? For 30 years?

    Huh?

    You’re not talking about passive investing vs. active investing. With that kind of ridiculous assumption you’re comparing passive investing to day trading.

    I have no doubt that active traders are constantly checking the market and live with more stress than a passive investor. But please use logic when coming up with these assumptions to support your numbers.

    As far as index funds are concerned, as I’ve posted on other reviews of passive investing, I am still baffled that so many personal finance “experts” (like Dave Ramsey, in particular) continue to push people towards passive investing in equity index funds.

    Every time I hear this, I want to ask : “Have you been living in a box the last year? Have you SEEN the 10 year returns on your precious equity index funds?”

    Yes, I know we’re in financial crisis, and as optimistic as I’d like to be, I just don’t think it’s prudent to continue to try and convince people that passive investing in an equity (stock) index fund isn’t incredibly risky. It is.

    I don’t care that it’s gotten 9% over 30 years. It’s gotten a negative return over 10 years. The last 30 years we’ve seen unprecedented growth in every industry AND especially in the stock market. In 1976 (when the fund you mentioned was created), stocks were not where people put their money. Equity investing as something for the general public has only really happened in the last 15 years or so.

    I’m just grateful that in this post, even though it’s only one sentence, you at least mention that there are OTHER index funds besides equities.

    I think now is as good a time as any to invest in an index or managed fund. But understand, just because the last 30 years have given us this “sure return” doesn’t mean the next 30 will.

  10. “Your extra effort of 25 hours a week for thirty years has earned you $286,295.18 – an hourly wage of $7.34. Congratulations, your investing expertise has earned you minimum wage.”

    I think accumulating almost $300K is a pretty good use of spare time. Most folks would spend that much money over that same time period, so that effort actually has you $600K wealthier than someone who wastes their 25 hours each week buying $200 of worthless stuff.

  11. I agree with the basic premise of this post but your example is pretty extreme – 25 hours of research a week? I don’t think too many full time analysts/portfolio managers put that kind of research time in.

    I think stock picking is more of a hobby – you need a pretty large portfolio to make it worthwhile (even if you can beat the market).

  12. I’ve been picking individual stocks for 10 years, and while maybe I should have, I have never spent an hour a week(per stock) researching.

    I agree with the first comment in that after doing the initial research I don’t spend much time on that stock anymore.

    But I’m a nickel & dimer (hardly ever invest more than a grand at a time) so perhaps thats why I’m cavalier about it.

  13. Trent, you view investing through the flawed MPT model and I don’t, so we can’t agree on risk and reward. OK.

    But why do you think confident investing is only for people with money? The best time to not diversify is at the beginning, when only a few years’ savings are lost with a mistake. It’s also before one’s positions are large enough to influence the market.

    The hourly wage might not be high, but one of the best times to to actively invest is early on when there aren’t many other ways to make money. If I can save $3,000 from my job and turn it into $6,000, I just gained a year on my savings plan. That means more to me than during $1MM into $2MM later on when I have more skills, options and connections.

  14. Whether you spend 25 hours or you spend 10 hours a week, it’s still unlikely that you will be able to consistently beat the market over the years by 1 or 2 %.

    I’m curious, I know you preach to have a steady emergency fund and I’ve seen you talk about investing it in a CD. What about investing it in a mutual fund? Is that stupid?

  15. Matt – the whole point of an emergency fund is that its safe and easily accessible. A mutual fund is neither – it is just stocks and susceptible to the ups and downs of the market and you can’t usually get the money immediately. Here’s an example. Say you put your $5k emergency fund in a mutual fund in January 08. In Jan 09 your transmission fails and you needed to fix it. Your mutual fund is down 40%, do you really want to sell at this point? And if you do sell will it be enough to replace the transmission? And how long will you have to wait for the sale to go through and you withdraw the money from your brokerage account? Even if its a few days that’s a few days longer you have to wait to get the car fixed.

  16. To everybody pointing out that 25 hours a week is excessive: that’s probably true.

    On the other hand, it’s very optimistic to assume that you can earn an extra 1% annually (after costs, even) by picking stocks–especially when we consider the fact that the overwhelming majority of full-time professionals are unable to perform such a feat.

  17. Trent

    I’d like to suggest that you did look at both sides of the coin, but you neglected the ‘best’ side – the side unknown to most investors.

    That ‘side’ is the conservative use of options to hedge your passive portfolio. Sure, profits are limited, but in return, it guarantees very limited losses – when the market tumbles. Thus, the bursting of the technology bubble or the bear market of 2008 to early 2009 – will not hurt your account. Over the long-term, avoiding debacles should be an investor’s number one priority.

    My argument is not that passive investing is a bad idea. On the contrary, I approve of passive investing. But only when assets are protected from loss with option strategies.

    Thus, my reply to your title question is a big NO. Being oblivious is just sicking your head in the sand. Protecting your assets is the name of the game. My question is: Why do so many personal finance experts fail to understand the value of combining options with passive investing?

    http://blog.mdwoptions.com/options_for_rookies/2009/05/is-passive-investing-the-road-to-wealth.html

  18. There aren’t many guarantees in life, even fewer in investing. Buying an index fund guarantees you market returns less expenses. That’s a pretty sweet deal.

    For those who insist they can consistently beat the market, that’s great. Some people can, and you may well be one of them. However, I cannot. So I will stick with guaranteed market returns less expenses.

    Regards.

  19. No offense, and nothing personal, but the subtext of this article is idiotic.

    If you value your wealth and the financial security and opportunities they can have, a passive set-it-and-forget-it mindset is positively toxic.

    Honestly – how has the consistent buyer of something like VFINX (or FMAGX, SPY, etc) done in the past ten years – and how has the equivalent attitude to real estate – “just buy when it is right for you personally and don’t try to time it” done? smoking wreckage.

  20. I have a friend who does the research in some big firm so his boss can make stock buying decisions. He said that his boss basically treats him as a random number generator and that index funds are the way to go.
    If you get 100 professionals to toss a coin 5 times and to try to get all heads, some of them will manage it. Those people are picked out and described as talented investors. Next year someone else is the most talented investor. The idea that ANYone can outperform index funds consistently has just not been shown.

  21. I agree with you re the question of picking stocks. It can pay off for those willing to put in a good bit of time. But it is better for the typical middle-class investor to go with index funds.

    The big problem with the “oblivious” approach is that most Passive Investing advocates fail to point out the need to change your stock allocation in response to big price changes. That’s the “passive” part of Passive Investing. Invest passively and you will sooner or later face a wipe-out. Wipe-outs of your retirement account lead to a lot of stress. And stress can take more time out of your day than stock picking.

    I favor a rational approach to indexing, an approach in which you adjust your stock allocation as needed to keep your risk level roughly constant. I call this strategy “Valuation-Informed Indexing.”

    Rob

  22. While this may be a nit, I question the numbers presented. 10000 annually at 9.56% yields something around $156K, and at 10.56% around $163K. Even if you break it down to monthly submittals you seem to get less than the values presented. However it should be noted that doesn’t alter the specific point, i.e. that time spent on picking stocks, even assuming you can do a bit better than the market, may not be worth it for most folks casually investing.

  23. I just amazes me how people insist on rationalizing their belief that they can beat the market. The math is simple and undeniable. The passive investors, buying index funds, are guaranteed to earn the market average. Since the other investors (the Active investors) cannot all be “above average,” some of them will beat the market average, and some of them will lag it. Mathematically, they have about a 50/50 shot at beating the average. When you factor in expenses, brokerage fees, and taxes, less than half will beat the average. It’s a mathematical inevitability.

    And yet, you still get these 23-year old kids, making their first foray into the world of investing, convinced that if they just read enough finance websites, with their 2-hour old press releases and 20-minute old stock quotes, that somehow THEY can be in that mathematical minority that will beat the average this year.

    And next year. And the year after that. And somehow, they’re magically, super-intelligent investors that will be in that minority “above average” crowed year after year, even though they have no formal training in finance and lack access to the instantaneous information available to full-time professional money managers.

    Is it arrogance? Stupidity? Greed? A combination of all three?

  24. @Michael -”If I can save $3,000 from my job and turn it into $6,000.” Sounds good, but how does someone who is starting out with $3000 have enough knowledge of the market to double up? Don’t you have to invest a lot of time up front, or is the plan to get lucky?

    Me personally, I’d work a part time job for 600 hours to double up that $3000. 100% return for 12 hours of work a week. Or (hotly debated) number of hours a week to maybe not lose money.

    I thought the key theme of personal finance is that shortcuts don’t work?

  25. Steve, they have to learn how to trade which does take time and some initial losses. The difference between you and me is that I spent my 600 hours honing a skill that pays huge dividends later on whereas your part-time job probably doesn’t net you much more than the money. Most side businesses are like that. For example, The Simple Dollar did not make a lot of money in 2006, but Trent learned a lot about running a successful blog in those thousands of hours he spent.

    I do refer you to point #3 in my original comment, though: “Successful traders are often better at it than other things.” If you, Trent and I spent an equal amount of time learning stocks, I would probably do better than both of you, just like Trent would probably make the best blog and you’d be the best __________. I don’t object to the idea that many people are unfit to actively invest. I object to the idea that successful active investors see low returns for their time. I object because this article misrepresents time spent, outstanding returns and opportunity cost.

  26. But Michael, here’s the flaw in your thinking:

    We can’t all be “above average.”

    There’s no magic, faceless entity on the other end of all those trades occurring in the stock market. The stock market is nothing more than a bunch of people trading with EACH OTHER. And if everyone put in the 600 hours of effort “honing a skill” as you suggest, what do you think would happen? Would EVERYBODY suddenly, magically be better traders, and somehow EVERYBODY would defy all logic and math and achieve “above average” returns?

    Don’t you see? It just doesn’t make sense. The market is efficient. We can’t all be above average. The best tactic is to take the guaranteed average and plan your future accordingly.

  27. Trent,
    While you and everyone else have been talking about spending 25 hrs/week on individual stock pics (although that’s a exaggeration for someone working a full-time job and running a family), I get the sense that it was not even what you would have meant to start with!

    Quoting your initial lines on the article here:
    “You devote an hour a week to studying each stock in detail, so you know what’s going on with that company. You also devote five hours a week to finding new, worthwhile companies to invest in, potentially replacing the slots in your portfolio”

    I believe you would have counted 6 hrs/week (from the above), that translated to roughly 25 hrs/month and not 25 hrs/week!! And if that’s a number you thought you would suggest, that probably makes more sense for an individual stock investor. But now then, look at your revised numbers!

    Assuming 1% better return and that your calculations for difference are correct over 10 years ($10,037.11), that would be about $3.35/hr (and not $0.77/hr) over 10 years (for 25 hrs a month, 300 hrs a year, 3000 hrs for 10 years)!!

    And if you look at 30 years ($286,295.18 difference), it would be a nice return of $32/hour – I would take that anytime!! And that something that adds value to my time (in terms of knowledge) than having spent that time elsewhere is probably a no brainer.

    Bhavin

  28. @Michael,

    I didn’t get the vibe you did, that successful stock traders are not paid well. I thought Trent’s concession was that if you had the money, it could be worthwhile to be an active investor. It seems to me that a successful trader would have the money to invest, thus falling neatly outside of Trent’s main argument. Lousy writing tends to follow when you make allowances for every expert/exceptional case. Scott Adams has an acronym for this: BUCTOE (But Of Course There Are Obvious Exceptions). Making homemade laundry detergent is decidedly unfrugal if you won free laundry service for life. Oblivious investing would be hard to stomach if you’re an active trader. I think if trading is your passion, you should put in the time and risk.

  29. All it takes to be an above average investor is to avoid the crap that index funds are forced to keep. Indy Mac, Washington Mutual, Circuit City, etc. were obvious train wrecks, yet index funds had to stay invested in them until they lost enough value to be knocked off their respective indexes for the index funds to drop them.

    The individual investor, on the other hand, can chuck them as soon as the loose rail is spotted.

    Index funds and mutual funds have their hands tied, both in practical terms and regulatory terms, as to how much of a position they can buy/sell as their high volume actions greatly influence the market price of a single security.

    The individual investor does not have their hands tied.

    25 hours per week is an absurdly high number. It is, in reality, no higher than 7 and more likely around 1-2 hours per week in my case.

    I have a 15 year track record of beating the S&P500 and I’m not a “super” investor with huge sums, but it’s definitely been worthwhile. To learn, I merely kept a paper account for about a year before putting money in.

  30. I’m definitely guilty of tossing my investments in mutual funds and leaving them. Before I left for graduate school, I put all of my retirement fund in targeted accounts and haven’t really checked on their progress.

  31. Kevin, your hypothetical scenario will never happen. The “flaw” you see is based on events that will not occur. There’s a steady supply of poor traders in the markets (many of them professionals, ironically.) If most traders somehow did become as good as I am now, I would recommend active investing to fewer people.

    Say I told Trent that blogging is a waste of time because everyone might learn to write well and think of great ideas, and then he’ll have too much competition to make money. Maybe, but how likely is that and what does it have to do with the situation now?

    SteveJ, Trent’s whole point was that successful active investors don’t make much per hour unless they have a lot of money. I responded that in the long run, successful investors see a good return on their time, and that the bad numbers and assumptions in his post prevented him from concluding as I did. I even suggested that successful investing is more valuable for people without a lot of money or means to earn money, since I agree with him that rich people have many more routes to wealth besides public stocks. Although investing small sums pays as little as a part-time job, the skills and mindsets acquired through practice pay much larger dividends later. The same can’t be said for the job.

  32. @Michael,

    I suppose it depends on your tolerance for risks. Those skills at investing may pay off. They may pay off big. Likewise, working a job will pay off small, and may pay off big. I’d be interested to see stories of VPs starting off as part-timers vs dabblers consistently crushing the market. Of course, that’s all anecdotal and there’s far more part-time employees than people in the stock market. Either way, you can spend your time well or badly. You can get lucky, or not.

    I think it goes back to your passion, if I spend 600 hours on the stock market and don’t do very well/don’t enjoy it – am I any better off than doing some other thing well for 600 hours? In your case, you’ve done well trading and can advocate your position. In my case, I’ve done a share of “menial” labor and can attest to the skills and mindsets that experience brings to the table. The dividends for *me* have been quite large, but I can’t say I wouldn’t have done even better funneling that energy into investing. I’ll admit I may overvalue the consistency of a paycheck. Different strokes for different folks, and all that.

    Something else just occurred to me. I’m an engineer, so I work with people of that ilk. Some of them (many smarter than I), look at the stock market and go: “Hey this is a system I can figure out. I solve obscenely complex problems all the time with my amazing analytical skills.” That doesn’t seem to go well. Maybe they don’t put enough time in? Is your argument more of the “It’s possible to make a lot of money investing small sums” or “With sufficient practice, anyone can make a lot of money investing small sums”? The former seems undoubtedly true, the latter sounds like a book deal.

  33. Steve, it’s definitely the former. Like I said, successful traders are often better at it than other things. Investing with small sums is not dabbling when a person only has small sums. If a person’s savings are $4,000 and they invest all of it, it’s as serious as a millionaire investing a million.

    You do make a good point about the value and potential of a side job. Side jobs have benefitted me too so I shouldn’t have denigrated them. I still think investing skills are more useful, though.

  34. Sorry, my above comment wasn’t too clear.

    “investing is a choice between investing in equities actively (or stockpicking) or passively (as in index funds or their equivalent)” is a false dichotomy.

    The choice isn’t between picking stocks and holding stuff like VFIN – it is a question of how long (or short) you want to be in every asset class – equities, debt, commodities, currencies.

    Knowledge is power. Passivity is a great way to get negative returns and an underwater house.

  35. I would take exception to the argument you make that putting in extra time is not worth it for an extra 1 percent of stock market return. To have more than $286K at the end of a 30 year period, by your example, is actually quite significant… and I think most people would agree. That amount of money could add years to someone’s retirement. It could buy a house, several vacations, pay a grandchild’s college tuition, etc. And, I’m not sure, as others have pointed out, that it would take the amount of weekly time that you estimate to follow a particular investment once you have done your initial research and due diligence. Also, a final point, the AAII web site shows the S&P 500 has returned -5.3 percent total since 1998. In my opinion, it’s worth a few extra hours a week to squeeze as much return as possible from your investments. As a nation, we are likely going to be facing another decade or so of flat or negative returns from the stock market.

  36. I think by far the most insightful comments in this post have been from Mateo (comment #21, comment #36) and from George (comment #31).

    Saying that it is mathematically 50/50 for active investors to beat the market is to treat stock picking like you’re flipping a coin. Do you think someone with a clue about finances merely flips a coin about decisions – “Hmm… let me think about this. I could buy Circuit City or I could buy Best Buy. I could buy General Motors or I could buy Toyota. Let me just flip this coin!”

    I agree that index funds could very well be the way for most people to invest. But let’s not treat investing as if it should be some passive investment that you make and ignore thinking only “long-term.” The problem with this passive investment approach is every supposed personal finance “expert” always focuses on Equity Index funds. There are other types of assets to invest in, and if you’re throwing all your money in equities and thinking you’re diversified then you are SADLY mistaken.

    Just read Mateo’s comment (#36). That’s EXACTLY what type of “investing” you should be teaching to those who want to learn.

    And George’s comment (#31) explains exactly why just having something that follows the market is not necessarily the smartest idea. I personally agree with investing in index funds, but I’m not so ignorant as to see their incredible limitations, as they have to buy all the crap companies along with the successful ones in order to represent the “entire market.”

  37. The smartest minds in the finance world (Bogle, Buffet, Malkiel, Lynch) all agree that trying to beat the market average is a fool’s game.

    But then again, maybe they’re all wrong, and you anonymous finance blog commenters are right.

    I guess it’s up to the reader to decide which is the more credible opinion. Read some books and decide for yourself. Believing you can consistently beat the market is arrogant, ignorant, and will cost you an enormous amount of money.

  38. They all agree that average investors shouldn’t try to beat the market. Come on, Kevin…

  39. @Kevin

    I agree with Buffet. I agree that index funds are the smartest way to go for most investors. Most stock-picking is just gambling and mutual funds are burdened by higher costs. But let’s at least admit that there are some things terribly wrong with our assumptions about index funds, namely : “The market ALWAYS go up in the long-term!”

    Our personal finance “experts” have misconstrued these ideas and argued that passively throwing all your money in some equity index fund and then forgetting about it is how to invest.

    My point is if we’re going to talk about index funds, let’s at least realize that there are other index funds besides equities – and not advocate that people just throw their money in a big pot and then forget about it.

    The market doesn’t always go up.

    Your house really isn’t an investment. (It’s a place to live.)

    An equity index fund is not a diversified enough (news flash: It’s all equities).

    Referring to Buffet: Is he a “fool” because he actually tries to invest his money in companies that are profitable? Or do you think he became one of the richest men in the world by buying a little piece of every company?

    Let’s stop putting the equity index fund on a pedestal and recognize it has incredible limitations. I agree that they are generally the smartest way to invest, but they aren’t the ONLY way to invest. I bet most readers don’t even realize there is a bond index fund (Vanguard’s VBMFX) that has had fantastic returns over the last ten years, as opposed to the abysmal equity index fund.

  40. First of all, you’re completely mischaracterizing Buffet’s investment methodology. Buffet doesn’t buy stock in profitable companies. He buys profitable companies (a majority stake, not just a handful of shares), and takes an active role in changing them to make them even more profitable. You need an enormous amount of capital to do what he does, and thus his approach is impossible for the average investor. Let’s be honest here.

    Secondly, if it’s so easy to beat the market, how come so few mutual funds are able to do so? I mean, that’s the whole IDEA of mutual funds, isn’t it? To have an educated, experienced, intelligent mind making rational, wise trades in order to earn a better return? After all, if index funds are forced to hold dogs like Circuit City and GM, whereas mutual funds have the flexibility to ditch such losers and only buy winners, how come mutual funds do so poorly? How come so few (less than 5%) are able to beat the market consistently?

    If those highly-paid, highly-educated geniuses can’t even beat the market, what hope do YOU have?

  41. Kevin, you should read Peter Lynch on why mutual fund managers are actually bad at managing money. It’s not because nobody can be good at it.

  42. Just to update this. I increased my holdings at the time I was making these comments by 300% since then, and it required perhaps 2% of my free time.

    I doubt that Kevin’s index fund strategy has done so well.

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