Indexing: A Timely Check-in

With the passing of John C. Bogle recently, it is as timely as ever for this blogger to do a little quick-take on his investing strategy and to make sure all is still in line with his goals and beliefs.

Bogle, of course, was the man who pioneered the Index Fund, an investment vehicle designed to mimic or track its respective Stock Market Index. This index can be a particular part of the market, such as, say, Information Technology (VGT) or, say, all of the US stock market (VTI) by bundling many companies together in one ‘stock’ that an individual can purchase at a relatively low fee in comparison with hiring an active money or mutual fund manager.

Since this time, this investing strategy has saved investors hundreds of millions of dollars in fees and birthed an entirely new investing strategy, particularly for long term investors who believe that even the most ardent professionals will not be able to consistently beat the market.* Mr. Money Mustache, his predecessors, and virtually all of the FIRE bloggers that have come since employ indexing as a fixture of their investment strategy.

I often listen to some great podcasts related to saving and living well. A lot of them are long-form interviews such as The Tim Ferriss Show, or news and opinion such as The Economist or various programs from NPR such as Planet Money and The Indicator. And within all of these there is a ton of great information and inspiration for blog posts and discussions, but sometimes the lag time and my inability to turn the inspiration into an article before the next spark of inspiration has hit means I don’t get these great thoughts and bits of information out to you, the readers! And that is the true shame, as the point of all this – besides continually reminding myself of and being accountable to my goals – is to pass on a little bit of useful information to others that can make their lives and the world just a little bit better (bit by bit).

Anyway, today I was listening to a fairly new podcast from The Economist – a program they call Money Talks – in which and the host are discussing Index Funds and the legacy of Bogle, as well as the current state of the industry and some of the potential perceived drawbacks to the investing strategy, etc. So, instead of using my insistence that every blog post I write be full of detail and completely in-depth on every topic I breach in order to even consider writing it, I just thought I would try to get some of the take-homes of this great discussion out there to you, and perhaps spark a little discussion of our own (in the comments or on Twitter).

  • At first (and still sometimes now), people laughed at the idea and were even hostile towards** it, and even said it was ‘un-American’ in its aim to strive for ‘average’ (which it turns out is pretty good actually, especially when it’s free)
  • Although difficult to actually measure, about 20-40% of the public equities markets are ETFs or Index Funds. A “significant minority”.Although some still say passive management removes efficiency from the market and detracts from the market’s ability to hold companies accountable by overwhelming it, the evidence for this is weak, as is the track record of institutional investors’*** to actually do this themselves.
  • The last point may depend on what type of person is using Index Funds vs. actively investing in individual stocks. Presumably, it is people who don’t have the time, information or know-how to actually beat the markets that are attracted to the idea. People such as me, with their so-called ‘dumb money’ are probably much better off in one fund that owns hundred of company than trying to pick one long-term winner out of all companies. And this may actually improve the efficiency of the markets to price equities correctly vs. if this money were being used to ‘guess’ at stocks as it was before (or simply not in the market at all, yet another variable to consider).

So, for now it seems the reasons so many of us are currently using Index Funds still hold sound and that it’s a good strategy for almost all investors.

After all, every company ‘goes to zero’ eventually****.

*unless based on largely chance which, ultimately, will be the end of consistency

**This was in about 1975, following a bad time for stocks, so in general investor sentiment was low at the time as well.

*** (i.e. hedge funds, etc. that claim to be able to take your money and beat the market for you with it, then charge you the difference whether or not they actually do)

****google search “Sears”

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