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Index Fund Booster Takes Victory Lap: How You Can Win Too

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I started writing books extolling the virtues of index fund investing back in 2006. At that time, there were already many advocates of the concept, including Burton Malkiel, Larry Swedroe and, of course, John Bogle. The problem then (and even now) was that we were like canaries in the coal mine -- small voices warning of a larger danger.

We were massively outnumbered and significantly outspent. Stories about outsized returns, "hot" fund managers, market timing and underperforming stocks dominated the financial media. They still do.

We were derided and trivialized when we discussed index funds on television. I appeared on CBNC's "Power Lunch" on May 15, 2009. At the time, CNBC used the slogan "In Cramer we trust" as part of its marketing.

I've written a number of blog posts describing how Jim Cramer's antics harmed investors. In one, I quoted David Swensen, a respected financial author and chief investment officer of Yale University, who believes Cramer "exemplifies everything that's wrong with the advice -- and I put advice in quotation marks -- that is given to individual investors." I also referred to a study by Barron's that found "Cramer's recommendations underperform the market by most measures."

This interview represented my chance to make my views known to CNBC's own audience. I couldn't resist. When asked by CNBC's Brian Schactman about the best ways to save for retirement, I said, "One of the things that you could do instead is to give us more 'in Bogle we trust' and much less 'in Cramer we trust.' "

An Angry Cramer Crashes the Interview

Cramer stormed onto the set. With his eyes bulging, he trashed index funds with this comment: "In all due respect, the S&P is flat literally for 10 years. That's John Bogle's world. If you were to sell at 11,000 like I told you in September, 10,000 like I told you in December, and then get back in at 6,500, who wins? Is that so bad? Is that worth not trusting in?"

Cramer continued his rant: "I've had it with the people who tell me about the index fund," he screamed. "For 10 years they've done nothing! For 10 years! When do they get called on the carpet? When are they ever wrong? Do we have to wait another 10 years? Enough of this! I've said my piece."

Investors would understand that Cramer and others who peer into their crystal balls are emperors with no clothes.

In retrospect, I can understand his anger. If investors followed the evidence and limited their investments to a globally diversified portfolio of index funds, in a suitable asset allocation, he would be irrelevant. Investors would understand that Cramer and others who peer into their crystal balls are emperors with no clothes. They pretend to have an expertise that doesn't exist. His show would be quickly canceled.

What a difference five years has made. Charles Ellis, author of "Winning the Loser's Game" and an adviser to Yale's endowment fund, published an article about the fall of performance investing in Financial Analysts Journal. Ellis, a long-time proponent of indexing, concluded that the costs of active investments are so high and the incremental returns so low, "the money game is no longer a game worth playing."

What Hindsight Shows Us

John Rekenthaler, the director of research for Morningstar (MORN), questioned the future of active management. He noted that net sales over the past 12 months for all index-based funds was 68 percent of the total market share, compared to only 32 percent for active funds. His conclusion was stunning: "Active managers have become the periphery. As the slogan goes, there is core, and then there is explore. Active management is no longer core."

Perhaps the death blow to active management came from Warren Buffett. In Berkshire Hathaway's 2013 letter to shareholders, Buffett noted that he instructed his trustee to invest his wife's inheritance in low-cost index funds.

I never believed I would see the time when index-based investing would be considered mainstream. And while this is a welcome development, most investors are still not benefiting from it. According to Morningstar, as of July 31, assets in passive U.S. funds were $3.11 trillion, compared to $5.50 trillion in actively managed funds.

Before I take my victory lap, I want you to join me by dumping your actively managed funds and your individual stocks. You should recognize that no one has the skill to time the markets. If you do have brokers or advisers who are telling you they can "beat the markets" using actively managed funds, you need to make a change. Join the mainstream and become an evidence-based investor.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."


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mac2sr

Booyah

September 05 2014 at 2:57 PM Report abuse rate up rate down Reply
Pete Nikolai

While I agree on the value of index funds, I also agree with Cramer's statement about getting out when we are obviously entering a bear market. I combine the two tactics into one strategy where I buy leveraged indexed funds when the market is trending up and get out or buy inverse leveraged funds when the market is heading down. Performance has been incredible! See WaveInvesting on Twitter and Facebook...

September 05 2014 at 9:19 AM Report abuse rate up rate down Reply
Valerie

This article was well written ---- up to the point where the writer advised everyone to drop their managed mutual funds AND their individual stocks and invest ONLY in index funds. That's where the writer went seriously off the track.

If investors use common sense and don't spend their time chasing the latest "hot stocks", it is entirely possible to combine basic index funds AND a carefully chosen portfolio of good individual stocks paying attractive dividends.

Jeremy Siegel (among many other well-respected financial authors) recommends doing exactly that. Invest long-term in a basic broad spectrum total index fund as your base investment and then add a selection of what he calls "El Dorados", which he defines as companies that have a LONG history of paying good dividends no matter WHAT is going on in the stock market.

John Bogle phrased his advice in a slightly different way. "Buy right and hold tight". That advice can apply equally well to both index funds AND great companies paying attractive dividends on their company stocks.

It IS possible to have the best of both these investing choices. Personally, I wouldn't even consider selling off my entire portfolio of individual dividend-paying stocks OR my portfolio of two basic Vanguard index funds (75% total stock market index fund and 25% total international stock index fund). I'm very happy with the performance of BOTH portfolios.

September 04 2014 at 2:11 PM Report abuse rate up rate down Reply
rbearland

Some of us enjoy watching Mad Money. It's more entertaining and informative at that time period, and if we listen closely, then we'll probably learn something.

But for those folks who are into gloom and doom bit or the hate obama stuff, then keep watching CBS evening news or the Fox and buy the all drugs they advertise.

September 04 2014 at 1:58 PM Report abuse -4 rate up rate down Reply
gizmo4257

Cramer is a fraud.... he lines his pockets on subscriptions and that's all he cares about. I followed his advise for over a year and lost thousands of dollars. Do your own research and listen to other people...you'll be better off for it

September 04 2014 at 1:39 PM Report abuse -1 rate up rate down Reply
razov

I joined the ever-growing list of "Cramer Contrarians" that do just the opposite of what old Jimmy-boy promotes. Once you realize he is just a clownish entertainer, not qualified to act as an investment advisor, you will be better off. I will never forget his irrational hysterics in October 2008 screaming that the average investor needed to get out of the market. Those who heeded this ill-fated advice then missed the greatest buying opportunity in the Spring of 2009 when all the blue chips were on sale! I bought shares of Ford at $3.05 after it bottomed out and Iv'e never tuned into Mad Money again.

RZ in CT

September 04 2014 at 1:37 PM Report abuse +3 rate up rate down Reply
bolten2

Cramer was right. From 2000 to 2010 indexing was absolutely flat. I held and bought through the entire period. 2011 to 2014 more than made up for it. Cramer cant market time better than anyone else but he may convince the uninformed he can.

September 04 2014 at 12:38 PM Report abuse +3 rate up rate down Reply
sandi

Are we having a hissy fit?

September 04 2014 at 12:29 PM Report abuse +3 rate up rate down Reply
lsloanpdx

3 SIDES TO EVERY STORY. Over 30 years hae ammassed a portfolio of over $2M starting with 10 shares of Standard Oil NJ and 10 shares of Allied Signal now Honey well. This started in 1965.

Dividend reinvest ment and added shares. I only sell when I no longer want the stock .

During the drop of the 2000's I remained reinvesting and when Dow 13 went to 12 I added cash shares. when Dow 12 whent to 1 I added shares, etc. when dow 7 went to 6 I added shares aand also held my nose. Those shares are now at Dow 17.

I have never traded in hope of catching a hot knife. I do use limit orders and wait for a dip.

2 limit orders executed during the flash crash.

I also use ETFS for a broader view of a smaller subject .

In my view, Any one who only has one view of a subject as broad as stock investing is waiting to get hurt.

The Market has recovered from every pull back.

September 04 2014 at 11:47 AM Report abuse rate up rate down Reply
moods07moody

Thank you Mr. Solin for your beautifully written article! I'm a big fan of Mr. Bogle's. When the 2008 crash happened he's the only person in the public eye who recognized the need for members of boards to sign a fiduciary agreement. The rotten collusion that takes place among CEOs and their carefully placed buddies on the board makes for a costly, corrupt equation for all of us. Democracy only works if there is integrity. I think John Bogle is a man of great integrity.

September 04 2014 at 11:20 AM Report abuse rate up rate down Reply