I have been in the “money game” for a long time starting with a bank just prior to the crash of 1987. I make this point only to say that I have seen several full market cycles in my life, and my perspectives are based on experience rather than theory.
In 1999, there was a media personality who berated investors for paying fees to investment advisors/stock brokers when it was clear that ETF’s were the only way to go. His mantra was simply:
“Why pay someone to underperform the indexes?”
After the “Dot.com” crash in 2000, he was no longer on the air.
By the time the markets began to soar in 2007, there was a whole universe of ETF’s from which to choose. Once again, the mainstream media pounced on indexing and that “buy and hold” strategies were the only logical way for individuals to invest.
“Why pay someone to underperform the indexes?”
Then came the crash in 2008.
Today, we are once again becoming inundated with articles as to why it is “apparent” that individuals should only be using low-cost indexing strategies and holding for the “long term.” To wit:
“When it comes to investing, it’s a losing proposition to try and be anything better than average.
If there’s no point in trying to beat the market through ‘active’ investing – using mutual funds that managers run, selecting what they hope are market-beating investments – what is the best way to invest? Through “passive” investing, which accepts average market returns (this means index funds, which track market benchmarks)”
Of course, with the market seemingly impervious to any type of serious downturn, individuals are indeed listening. Via CNBC:
“Flows out of actively managed U.S. equity mutual funds leaped to $264.5 billion in 2016, while flows into passive index funds and ETFs were $236.1 billion, according to data provided by the Vanguard Group and Morningstar. That was the greatest calendar-year asset change in the last decade, during which more than $1 trillion has shifted from active to passive U.S. equity funds.”
Of course, the next crash hasn’t happened…yet.
But therein is the point.
It is effectively the final evolution of “bull market psychology” as investors capitulate to the “if you can’t beat’em, join ’em” mentality.
But it is just that. The final evolution of investor psychology that always leads the “sheep to the slaughter.”
The Inherent Costs Of “Low Costs”
There is a “cost” to chasing “low costs” and “being average.” I do NOT disagree that costs are an important component of long-term returns; however there are two missing ingredients of “buy and hold” index investing are ignoring: 1) time; and, 2) psychology.
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