Index investing works for most people. It’s definitely better that daytrading 🙂 I don’t think it would be a good idea to have everyone actively trading stocks when they could be passively investing in a diversified portfolio.

There’s a lot of good quality dividend names out there which are trading at prices lower than what they have been in years. As for the $88 drop in income, seems to me that your dividend portfolio is not producing over $2000/year in dividend income..

My dividend income from what I consider my retirement portfolio is currently $3000/year. The $88 drop was thus about 3%. I hope to add a few hundred bucks more in income over the next week or so.
My main bank is WFC which recently raised its dividend (AIG did the same though just before they took at dip) My secondary bank is GE which just announced that they are not going to raise dividends next year (after having done so for the past 30+ years).
I also have some income from mutual funds, interest from savings, and some non paying stocks which I am not liquidating due to capital gains taxes, etc.

Quote:

“Dollar cost averaging only works insofar the the final price is higher than the average price and not surprisingly, most proponents of dollar cost averaging finishes the the example on a high price, not a low price. In reality dollar cost averaging cuts both ways and it only works to average out volatility. So much for that theory.”

I think you’re missing the whole point of dollar cost averaging – which is to mitigate risk. What if the index investor bought all their shares at the top of the market in 2001 or whenever – they’d be down a lot more than someone who, through dollar cost averaging, bought the same # of shares.

Index investing and dollar cost averaging are not equal. In fact, I would guess you are dollar cost averaging if you are reinvesting your dividends.

http://en.wikipedia.org/wiki/Dollar_cost_averaging

I’m glad someone is calling this “strategy” to task. It’s ridiculous.

I find it amusing that some posters think you are advocating a trading strategy, like there is only index or trading options.

Personally, I don’t like to limit myself. If stocks look good for 5 years, I will hold. If they look terrible, like they did last fall, I will sell and wait for a good entry point. Why restrict yourself to one strategy, when there are numerous ways to make money. Everything works at some point. Buffett makes money no matter what happens. Why? Because, his strategy changes. He wasn’t buying 10% preferred with options in the 70’s, but he is now. Why? Because the man knows a good deal, no matter how it is structured. Look for the undervalued and buy. Is there any other way?

@Kevin – passively managed is an oxymoron 🙂 Even the SP500 and the DJIA change their components from time to time. I think the main problem is in doing what everybody else does (owning things that everybody else owns) and specifically trying to be average. I think the main virtue of indexes is that they instill a certain discipline and avoids too much turnover. In fact I’d bet that a large part of the reason that so many actively managed funds underperform is due to their high turnover.

@Kevin M – Dollar cost averaging reduces volatility. Volatility is often thought of as risk (especially by the efficient market theorists). Dollar cost averaging does not reduce downside risk which is what value investing tries to do. If you bought in 2001, you would have had a lot of downside risk. If you bought in 2003 you would have had less. I agree that they are not equal, but index investing and DCA are often done by the same people. DCA in particular is popular by the majority of people (easily associated with automatic withdrawals, Wall Street job security – hence very much promoted). I do not automatically reinvest dividends. My money generally flows to whatever is currently most undervalued. I just bought some REITs (HRP and BEE). Another reason that I don’t automatically reinvest dividends is that cost basis calculations become a nightmare (I won’t rely on programs to do that).

@Chad – Indeed, the drive for “eternal strategies” is strong. Index investing has not worked since the major 1982-2001 trend. Value investing does not always work, etc.

@DGI – I’m not sure I understand the choice of RPM. What’s the motivation there?

@DGI and Steve Austin – I do not have any experience in buying MLPs or LPs. Don’t they come loaded with wicked tax filling requirements? Any good ways to get started on it. I would dearly love to own infrastructure.

Jacob –
You’re correct about MLPs and LPs coming with “wicked” tax complications. You’re looking at filing Schedule E, as well as at-risk limitations and passive activity rules if there are losses. I’m sure there are good ones out there, but none of my clients seem to get much out of them other than a much bigger tax preparation fee.

That’s what I figured. To me “index investing” means buying and holding mutual funds that use a static, mathematically-defined trading strategy, and as a result have low expenses, low turnover, and low exposure to human error. The most common strategy, and the one you’re arguing against, is to buy one fund tracking the S&P500 or total market, but in my mind “index investing” encompasses other strategies as well.

That being said I’m skeptical that there are enough people using this strategy to influence the market significantly. It certainly dominates the blog world, but anecdotally every stock investor I’ve talked to either buys traditional actively managed funds or churns individual stocks haphazardly. I’m curious if anyone has figures on the percentage of the market owned by index funds.

@ABC of investing – Counting in the dividends of market funds is almost irrelevant. They’re 1-2% (higher now) or lower than inflation. If you assume no inflation, you’re looking at doubling times that span 1-2 generations.

@kevin – As far as I know, it is mostly big institutions that does most of the buying and selling.

Index investing and dollar cost averaging are both very good ways to get AVERAGE returns over the LONG TERM. They are simple and have lower risk and volatility. If you are in the market for long term and wish to mitigate risks of high loss then Index investing and DCA are both good choices.

Index investing is simple and easy. It has high diversity and gives average rates of return for the market. Sure you can feasibly do much better if you pick the right stocks, but you can also do horribly if you pick the wrong stocks. If you don’t like index investing then what is your preferred alternative and WHY?

I really don’t see ANY reason dollar cost averaging is a bad idea. It averages out the ups and downs in a volatile market. DCA just keeps you from having bad luck or avoiding the trap of thinking you can time the market. If you don’t like DCA then whats your alternative solution and WHY is it better? Steve mentioned Value averaging above which is one reasonably good alternative.

Jim

@ABC – I just picked the present method. There are people that fail “in the long run”. What we see right now is a transfer of wealth from those who just retired to Generation Y.

Actually it is possible in this environment to create a now fee index fund ( Dow or S&P 500) if you had a larger nest egg and used one of the many free trade brokers out there..

I’m not sure index funds are dead. There are lots of active funds that have lost even more or went out of business. The problem isn’t index funds (you could have purchased a gold fund and it would have gone up a lot), but one of asset allocation. Risk was sold too cheaply for a long time in the US and Europe. Investors took on too much risk for too little reward and we are now only playing catchup. It will turn around again one day.

Do you understand that by trying to beat the market average over the short to medium term, you are playing against professionals who are better informed than you and have lower trading costs than you? The only possible advantage you have is that you are so small that none of your trades will move the market, but even this advantage is disappearing due to high-frequency trading.

All a hedge or mutual fund manager has to do is read your “brilliant” strategy as described on this website and duplicate it and voila! He beats the market averages, investors flock to the fund, and he gets a huge bonus. The world of investing has no barriers to entry and is extremely competitive. “Brilliant” strategies don’t last for long, especially when they are advertised.

Beating the market over the long-run is a different story, because fund managers can’t just sit around in bonds for 10 years or so when the market is overpriced. They’d be fired or lose their clients long before the 10 years was up. Individuals can, and the smarter individuals did back in 1999. But the US market cap alone is $15 trillion and there simply aren’t enough of such long-term oriented individuals to push they market down.

In other words, the intelligent thing to do is buy index funds when they are fairly priced (because the market IS relative-value efficient in the short to medium run due to extreme competition) and switch into bonds or cash when these index funds get overpriced (due to periodic irrational exuberance by the masses).

In the long run, the average investor must get the average return, and this average return must equal the marginal cost of capital, which is the return necessary to induce savers to invest one more dollar into the stock market (via IPOs and other primary sales, since the secondary market does not involve new investment), which is probably about 5%/year after inflation (3% risk premium over the 2%/year from long-term TIPS). For you to get more than 5%/year, someone else has to get less. Who are these dummies? Why aren’t the hedge funds picking them off before you?

I think you need to read “Fooled by Randomness” by Nassim Taleb.

> The attraction of index funds, dollar cost
> averaging, etc, is that they make for neat
> marketing content because they appeal to the
> unsophisiticated (read: non-investment savvy)
> masses who want to get rich without doing
> anything.

The easiest first step for the masses is to actually SAVE money. ERE strategy is a winner here and it doesn’t matter whether you use index funds or not.

I’m not a fan of index funds because:

1) they buy & hold stocks that aren’t worth owning simply because they’re in the index

Example: Expensive BP floating rig catches fire… not a big deal in the industry until it tips over and sinks. Once that happens, you KNOW BP stock is going down, so why not sell it ASAP? Nope, the index fund has to continue holding it because it’s in the index.

2) they have to deal with investors hopping in and out of the fund, thus setting up random buy & sell moments

Example: In a widespread liquidity or unemployment crisis like we recently had, people are getting out of the index fund not only because they’re fearful, but also because they may simply need money. Which creates a positive feedback loop on the fearful part because the investment is losing value.

The problem is that for most people it is hard to save that 75 %. Just like R. Kyosaki said: “most people prefer to be in a comfort zone and stay like that all their lives, then make some effort for a while and then be free do anything”.

I index invest. I don’t hold single stocks (like AIG, you can lose the farm). My investment strategy involves the total market with strategic allocation, not just the S&P and I receive dividends. I’m lazy. I have better things to do than actively trade stocks, worry about whether a company will crash, or having to switch out stocks because of performance or a cut or loss of dividend. Index funds take care of all of that for me. I reallocate when needed. I’m not going to ERE, so I don’t care about creating income now. I think if you want to follow Jacob’s advice and ERE, then his strategy makes sense, but for the masses, index investing suffices.

I have used Total market allocation and indexing to build my nest for the last two years. For me, it is working. In a bad market, I was able continue to steel myself to save and invest, knowing that I was buying at good prices.
I am searching for a good investment weighting strategy to give some leverage to sell more when the market is high, and be ready for the next crash. Right now, it is seat of my pants winging it. My thinking is that if periodic reallocation forces me to sell high and buy cheaply, a doubling of that reallocation should be even better. I am currently overweight in small cap funds both in the USA and global markets figuring that as we recover from our current recession, these will be the early winners.
I tried following trend investing using mutual funds and had some very good years, but would lose my butt in down markets. I became a herd investor because of it and quit. Costs were too high and systemic mutual fund rules and whiplashes of fear and greed cause even the best managers to be forced to sell low and buy high.