I've just finished reading "Boglehead's Guide to Investing" hoping it would finally convince me into starting to accumulate some ETFs, but it left me question the whole strategy of indexing even more than before instead.
I personally didn't like the book that much because I think it lacks real data and references to back the few concepts on which the core of the book is based on. There are very few data comparison between different investment strategies and the whole concept of "buy and hold indexes" is based on the highly optimistic assumption that the stock markets can only go up indefinitely averaging 7-8-whatever % every year. I would have expected a more in depth dive into growth, economic expansion and multi year cycles.
Yes, I understand passive investing is superior for simplicity and costs compared to active investing, especially in an ever rising market; however I expected to find some more insight into why we should invest in the stock market in the first place.
First of all, there are no discussion made to attempt to rationalize the fact that world stocks performed so well in the past decades thanks to two core factors:
- Availability of cheap energy
- Exponential demografic explosion
Which, in conjunction with the rise of the American Empire and (in the last years) an exeptional operation of asset acquisition operated by central banks, generated the true reasons for the growth that we still experienced to this day.
In essence, the message of the book is to buy indexes and hope for the best, assuming future market wide performances MUST be similar to those experienced in the last, extremely fortunate in terms of economic growth, decades.
The approach itself is successful in the case economic growth is strong over long period of time, but what would happen if world markets get into a depression and never get back before, let's say, 20/30/40/50 years? In such case, wouldn't a more active approach be superior to a 100% passive one?
As many studies and predictions of future growth show, future decades might actually be a little different from the ones we experienced this far, in particular:
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Energy extracted to energy spent ration has decreased and is decreasing to worrisome levels like never seen before.
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Demografic is predicted to stagnate world wide for the first time in centuries.
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Systemic risks have risen since now markets are more interconnected and many social and political challenges lies ahead, especially automation.
While I agree the concept of indexing is appealing and might be successful on very long time frames, I can't help but think we are ignoring the elephant in the room: systemic risk.
The book mentions the Japanese stock market bubble and the subsequent never-be-seen recovery, buy it fails to try to discuss the causes of that type of bubble and how one could try to avoid it, or what is the chance of that happening to the global economy (liquidity trap comes to mind).
Basically my concerns come from the fact that for someone investing passively into indexes, there is in fact NO exit or backup plan: in a possible multi year bear market we simply use past performance to repeat to ourselves "it will eventually go back up".
And if we want to look into indexing into more details, we could also argue that if indexing itself becomes too popular, we are expected to see even more systemic risks related to poor market efficiency, like discussed many times here. The book never discuss these possible risks associated with indexing.
The rest of the book deliver very easy concepts about spending and saving habits that I'm sure no one here will disagree with.
I purchased this book because I hoped it could answer my concerns regarding global market risks and how to create a very well diversified portfolio. The book in my opinion failed to deliver a truly sound reasoning behind the concept of passive stock investing. The core idea of the book is:
Passive investing is superior to active investing because the stock market, in the long run, can only go up.
So my questions are:
Does that mean we are expecting a constant and exponential economic growth in the next decades?
What if we get a Japanese-like world wide crash and markets does not recover in many years? What would a retiree do in that situation?
Can there be a way to passively investing, while also being diversified and cover one self from systemic risks?
TL,DR: Finished reading "Bogleheads guide to investing" hoping that it would alleviate my concerns for world wide market risks associated with passive investing without real backup plan. I ended with more questions than before. In particular, I fear there is a market risk associated with expecting the stock market averaging 7+ % yield every year because of predicted slow economic growth and demographic stagnation in the next decades.
Submitted August 24, 2017 at 05:12AM by retal1ator http://ift.tt/2w6RfK3
