Could you elaborate on why that is the best thing for most people?
Also I did not say people should do their own research, I actually said the opposite, that even having done that most people will generally be their own worst enemies when it comes to investing as they are unable to remain impartial about their own money. I'm also admitting it can be hard, even impossible to get good advice at for a fee that makes sense. However the lack of the right service does not mitigate the need for it.
Could you elaborate on why that is the best thing for most people?
Because the evidence for "Mutual funds, in aggregate, underperform the market by precisely what they charge in fees; past performance of mutual funds does not predict future results; no more fund managers beat the market than would be suggested by random chance; capital flows into mutual funds are virtually invariably poorly timed to surge after they have made their gains, hurting fund performance" is incredible. It's, um, shoot, I need an analogy... you know how science suggests that cigarettes might not be a good thing health-wise? That conclusion is tentative next to "actively managed mutual funds are a poor investment vehicle."
Index funds are virtually structurally guaranteed to outperform actively managed funds for any given equivalent investment classes, because index funds also underperform the market by fees, but their fees are about 100 ~ 250 basis points lower. Over someone's working life, that turns into "Your retirement account is several times as large as your neighbor who used actively managed mutual funds."
Just some alternative thoughts that are sort of nuanced, but no one talks about for some reason:
1) Synthetic ETFs could pose serious problems and most investors are not familiar with the difference between them and physical ETFs nor are they aware if they even have them in their portfolio. This is a quick read that summarizes part of the problem:
2) How do you choose the correct ETF. How do you choose between emerging markets nd US, etc. Picking a broad market ETF is probably safest, but there is even a variety of those with different features.
4) Compared with no load funds, ETFs can be expensive due to trading fees. Obviously if you buy and hold great quantities of money it isn’t an issue, but it should be considered in your investment.
Presumably patio11 is talking about both, and if he isn't, many people who read this will assume he is. The tracking error issue can still come up with index funds, the differences between them are minimal:
Why it's the best for most people? Because study after study shows that generating alpha (excess returns that are not attributable to buying stuff with debt, basically) is _hard_. And if the risk is too high, just buy more US treasuries and less stocks.
Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them.
And if the risk is too high, just buy more US treasuries and less stocks.
US treasuries can carry high levels of interest rate risk if their duration is long. In otherwords if the maturity is really long, 10 years+, and interest rates go up, the principal value of your treasuries will fall dramatically.
Now, you can wait it out, but that won't help you in the long term when the market is paying out 10% and you are getting 0.25%.
Just a few days ago I read that Bain Capital's nice 20-30% returns were mostly based on leverage in a favorable market environment... I think there are a few people who really are good at choosing market segments or individual stocks, but you or your advisor-for-hire are not likely to be them.
Bain did this by taking companies private, then re-IPOing them. They are a private equity company and to my knowledge do not choose stocks and market segments like mutual funds do.
If you have huge exposure to technology through your career, it might make sense to underweight technology in investments. Maybe not as reasonable in the case of technology, but if I worked in something like print publishing, I'd probably not want much additional exposure to print publishing for my retirement.
Tobin's mutual fund theorem states that all investors should do their best to buy the market, and that risk-seeking investors should add leverage, while risk-averse investors should hold more cash.
For high-net-worth individuals, it's usually not worth actively managing most asset classes, but it might be worth scouting talent to run private equity, venture capital, and tech stocks, all of which are areas where the top quartile investors substantially outperform the bottom quartile.
For non high-net-worth individuals, it's almost never worth actively managing any asset class. The costs of management equal or exceed the probable excess returns.
Also I did not say people should do their own research, I actually said the opposite, that even having done that most people will generally be their own worst enemies when it comes to investing as they are unable to remain impartial about their own money. I'm also admitting it can be hard, even impossible to get good advice at for a fee that makes sense. However the lack of the right service does not mitigate the need for it.