What caught my eye this week.
Like anyone who understands the mathematical case for index funds, I find the attacks against them almost universally spurious.
As Rick Ferri wrote this week on Forbes:
The truth about index funds must be repeated often because lies are constantly being told. They are successful because they are good. Those who cry wolf either don’t know the truth or have a strong financial incentive to ignore it.
Happily, the message seems to be more than getting through. The Abnormal Returns blog noted this week that with US equity passive and active strategies now having equal amounts of trillions under management, the question is how much further passive investing can grow.
Before we get carried away, I’d note that much of those ‘passive’ trillions are in ETFs. And ETFs are often used as trading vehicles by fund managers. So it’s unclear to me whether more than 50% of invested money really is lying on a metaphorical sun lounger, accepting the market’s return while its owner does something more interesting instead.
Nevertheless, the direction of travel is clear. Ever more investors are passively accepting what the market gives them – minus tiny fees – and building long-term financial plans around that reality.
What’s the catch?
This brings me to an interesting opinion piece in the Financial Times – and also to the only push back against the rise of index funds I’ve ever found persuasive.
Starting with the latter, occasionally someone says something like:
Index funds make all this too easy. I can put my money into an all-in-one passive equity and bond fund, leave active investors to make all the hard decisions, and take 8-10% a year? It is too good to be true. Stuff like that usually ends badly in the financial markets.
And this touches a nerve because… I sort of agree. When something works too well investing, with too little downside, well, sooner or later it usually blows up.
Now of course index funds do come with downside. Shares definitely go down as well as up!
I hear people, especially in the US, saying stuff like “I play it safe with my S&P 500 index fund and don’t take too many risks”.
That is a ten-year bull market speaking.
But let’s put normal volatility to one side. There is still an inherent tension with index funds in the strategy being the easiest AND cheapest AND biggest AND YET it relying on a shrinking supply of people doing the most expensive thing, which also happens to be the hardest, for overall lower returns.
Then again, tension-schmenshion – active investing is a zero sum game. That won’t – can’t – change.
So how does too-good-to-be-true resolve itself?
Let them eat bonds
Back the FT article [search result] where author John Dizard compares confident equity investors to the indolent aristocrats of the French Revolution, adding:
The retirement savings/investment industry is promising the creation of a class of notionally idle, ie retired, people which will be at least an order of magnitude larger as a share of the population than la noblesse.
This group would be with us for decades alongside a stagnant (at best) working-age population.
At the same time Prof Siegel and the equity cult would ‘reform’ state entitlements so those without equity portfolios have to perform real work up to and even through their 70s.
The statistical construct of eternally compounded 6 per cent-plus investment returns has allowed upper middle class people to believe this Disney movie.
Doesn’t Dizard have a point?
At least active investing looks like work.
At least in the old days a saver giving their money to a fund manager looked like a risk-taking investor.
And at least ducking in and out of the market in a futile effort at market-timing looked like skill, risk, and reward at play.
Sure in reality we know the market’s aggregate return is the same, whether the money is investing passively or actively, ignoring fees.
But if the woeful politics of the past few years have taught us anything, it’s surely the importance of optics.
Perhaps the Achilles’ Heel in the kind of dial-it-in global-tracking we champion on Monevator could be political backlash, rather than bogus mathematics?
I’m not convinced but it’s worth a ponder.
What do you reckon?
Why your life expectancy is probably much longer than you think – Monevator
From the archive-ator: Why does Joe Public love sweatshops? – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Pound marks longest losing run against the Euro since trading began in 1999 – ThisIsMoney
Digital banking app Loot goes bust after it fails to raise more funding – Moneywise
Facebook and City banks among the highest-paying UK firms – Guardian
Index companies to feel the chill of fund managers’ price war [Search result] – FT
An interview with the founder of the (would-be) Long-term Stock Exchange – Vox
A reminder: Average returns are rarely what you get in any given year – Independence Advisors
Products and services
Investors itching to switch kept waiting for up to a year [Search result] – FT
Facebook plans to launch ‘GlobalCoin’ cryptocurrency in 2020 – BBC
How to earn cashback on every £1 you spend – ThisIsMoney
Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter
Reassessing Vanguard Lifestrategy funds from a climate emergency perspective – DIY Investor
Natwest does a U-turn on 0% credit cards, launches new offering – ThisIsMoney
Compact homes for sale [Gallery] – Guardian
Comment and opinion
Stop the financial pornography! – Of Dollars and Data
Not my priority – Humble Dollar
What’s the best diversifier for equity risk? [US but relevant] – Morningstar
How to pass on your wealth without paying the taxman – ThisIsMoney
How to plan your finances if you or a loved one has dementia – ThisIsMoney
What happens after you achieve financial independence? – Get Rich Slowly
Why are other investors so biased? – Behavioural Investing
Larry Swedroe: Factors are for holding – ETF.com
Nick Train, Terry Smith, and some other famous fund managers offer tips – ThisIsMoney
A takedown of technical analysis – Mathematical Investor
Tucking into Domino’s Pizza shares – Sharepad
How inflation makes the value factor a sector bet – Fortune Financial Advisors
Broken homes produce more cautious fund managers – Institutional Investor
May ends as she started: With the greatest lie of all – Politics.co.uk
What does Theresa May’s resignation mean for Brexit? [Search result] – FT
Stand by for a summer of Tory fratricide and country-shafting – Guardian
Kindle book bargains
My Morning Routine: How Successful People Start Every Day Inspired by Benjamin Spall – £1.99 on Kindle
Reset: How to restart your life and get F.U. money by David Sawyer – £0.99 on Kindle
So Good They Can’t Ignore You by Cal Newport – £0.99 on Kindle
The Personal MBA: A World Class Business Education in a Single Volume by Josh Kaufman – £1.99 on Kindle
Off our beat
Impossible Foods’ rising empire of almost-meat – Engadget
10 inspirational newsletters that will improve your life [allegedly] – Fast Company
Seven climbers die after getting stuck on an overcrowded Everest – BBC
“Everyone sees what you appear to be, few experience what you really are.”
– Niccolò Machiavelli, The Prince
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