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http://www.fool.com/investing/general/2009...ng-term-in.aspx

Thoughts on this guy's perspective? I don't agree with him at all, but I was wondering if someone a bit more knowledgeable than me about the market might like to comment on it. Some of the comments on the original article have already pointed out some of my objections rather well.

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Bogle built his company on the idea of index-funds. These, in turn, are based on the notion that -- other than by luck -- it is extremely difficult to make investment choices that are relatively better than the choices that others are making. According to this view, even if some experts can do better, they usually charge for their services, and rarely do so much better as to justify their fees. There are various studies that show somewhere near 80% of mutual funds under-perform the market averages after one accounts for the fees they charge. Further, some financial planners act more like salesmen for certain funds, rather than keeping their client's interest front and center; so, throw in the possibility of not being able to judge who is a good advisor. All this ends up with the view that Bogle espouses.

When one looks at it from the point of view of an individual, I think Bogle's advice is good for many people, but not for all. This does not mean just buying the S&P Index, but I mean the broader idea of diversifying very broadly, with eggs in all baskets and very little conviction of what specific investment will do particularly well.

When one looks at the whole population of investors as a "system", Bogle says that a lot of trading simply means some lose and some win and brokers. The idea is that -- when summed up -- the system is worse of. This ignores the fact that passivity leads to other problems: particularly, entrenched managements not looking out for the long-term interest of their shareholders.

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What do you disagree with, Kat? We use Dimensional Fund Advisors (DFA) in my office, and I've been impressed. My boss used Vanguard previously, but found DFA to be superior to them. We still use Vanguard in situations where we cannot use DFA, but we're definitely ETF people with long-term investment horizons over here.

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When one looks at it from the point of view of an individual, I think Bogle's advice is good for many people, but not for all. This does not mean just buying the S&P Index, but I mean the broader idea of diversifying very broadly, with eggs in all baskets and very little conviction of what specific investment will do particularly well.
To put this differently: extreme diversification makes sense when:

  • one thinks there is no way that one can do better than the market;or,
  • one thinks there is no way one can choose an advisor/manager who is better than the market

OTOH, there are some who claim that anybody's attempt to do better than the market is a fool's game. This is a flawed view that arose from the so-called "efficient market hypothesis". See related NY Times story here.

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OTOH, there are some who claim that anybody's attempt to do better than the market is a fool's game. This is a flawed view that arose from the so-called "efficient market hypothesis". See related NY Times story here.

I think this is really what it comes down to for me. What I got from Bogle's article is that no one can beat the market ever except over the short term by luck, which doesn't seem to allow for having knowledge and insight about how a company will perform. That was probably what irked me.

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What do you disagree with, Kat? We use Dimensional Fund Advisors (DFA) in my office, and I've been impressed. My boss used Vanguard previously, but found DFA to be superior to them. We still use Vanguard in situations where we cannot use DFA, but we're definitely ETF people with long-term investment horizons over here.

Only problem with DFA's philosophy is that it represents an intrinsic approach to investing. Not that you can't make money at it, but the reasons are arbitrary.

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To put this differently: extreme diversification makes sense when:

  • one thinks there is no way that one can do better than the market;or,
  • one thinks there is no way one can choose an advisor/manager who is better than the market

OTOH, there are some who claim that anybody's attempt to do better than the market is a fool's game. This is a flawed view that arose from the so-called "efficient market hypothesis". See related NY Times story here.

I totally agree sNerd. I think the passive approach really only works when a minority of investors are doing that. Without actively trading, there is no one to make the markets efficient. That was one of the issues I had listening to interviews with Rex Sinquefield - he was always saying that you couldn't beat the market but this would mean that all information is reflected in every stock at any given time, which of course can't be true. But the alternative to that - at least the popular alternative - is the CAPM, so ..... <_<

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