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.
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won’t be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don’t leave any money on the table.
1. Make the right choices at open enrollment
Back-to-school time can be expensive if you’re not prepared. Money is spent on clothes, books, supplies and technology — and that’s before the doors to the classroom have even opened. Before hitting the stores, do these two things:
Conduct an online search for "coupon code" along with the name of any store you’ll be shopping at. Typically you can find some great online deals.
Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can’t get child’s "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
2. Spend wisely on back-to-school items
It’s hard to think about the holidays when we’re just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
3. Plan for the end-of-year holidays
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there’s room in your cash flow to allow for an increase to possibly max out by year end.
4. Maximize your retirement funding
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they’re panning out. If you’re recently married and haven’t already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you’ve moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
5. Consider your transitions
If you’re lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
6. Weatherproof your home
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