Benjamin Graham is widely considered to be the “father” of value investing, the process of finding individual stocks whose businesses offer the prospect of future price gains while offering reasonable protection against future losses.  Graham co-founded Graham-Newman Corp. nearly a century ago.  Stock markets have changed drastically since then. Early in Graham’s investing career, his approach was to buy stock in companies that were out-of-favour and severely undervalued.  He described these methods in his 1934 book Security Analysis . But Graham’s investment methods were never static.  As Jason Zweig explained in Episode 75 of the Bogleheads on Investing Podcast : “People criticize Graham all the time for being old-fashioned, for having these formulaic techniques for valuing stocks, … and then people say these things are all out-moded.  Nobody invests like that any more.  Nobody should.  And that completely misses the mark for two reasons.  First...

Many people like to say that passive investing doesn’t exist.  However, these people make a living from active forms of investing and are just playing semantic games to distract us.  Active fund managers and advisors who recommend active strategies are the main people I see claiming that passive investing doesn’t exist, but what they say isn’t true. There is a continuum between passive and active investing; they are not absolute properties.  We can reasonably call an investment approach passive even if it involves some decisions, just as we can call a person thin even if their weight isn’t zero.  We may disagree on the exact threshold between passive and active investing, but the concept of passive investing still has meaning. By “passive investing,” most people mean some form of broadly-diversified index investing with minimal trading.  Although passive investing usually requires substantially less work than active investing, passive investors still have decisi...

When it comes to stocks, index investing offers many advantages over other investment approaches.  However, these advantages don’t always carry over to other asset classes.  No investment style should be treated like a religion, indexing included.  It pays to think through the reasons for using a given approach to investing. Stocks Low-cost broadly-diversified index investing in stocks offers a number of advantages over other investment approaches: Lower costs, including MERs, trading costs within funds, and capital gains taxes Less work for the investor Better diversification leading to lower volatility losses Choosing actively-managed mutual funds or ETFs definitely has much higher costs.  For investors who just pick some actively-managed funds and stick with them, the amount of work required can be low, but more often the investor stays on the lookout for better funds, which can be a lot of work for questionable benefit.  Many actively-managed funds offer dec...

For fans of indexing and business stories, Robin Wigglesworth’s book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever is a page-turner.  Although this book is well-researched, it’s not a dry academic work.  Wigglesworth delves into the personalities of the important players who grew index investing to what it is today. The stories begin with pioneers who sought to bring scientific rigour to investing rather than just rely on the instincts of investment managers.  These builders of index funds faced initial investor indifference as well as scorn from the traditional investment industry.  Index funds were even labeled as “un-American.” Throughout the birth and growth of indexing, fund managers became increasingly aware of the threat to their incomes.  In 1973, “one anonymous mutual fund manager griped to the Wall Street Journal ” that “a lot of $80,000-a-year portfolio managers and analysts will be replaced by $16...

The financial products available today can make do-it-yourself (DIY) investing very easy, as long as you don’t get distracted by bad ideas.  Here I map out one possible lifetime plan from early adulthood to retirement for a DIY investor that is easy to follow as long as you don’t get tempted by shiny ideas that add risk and complexity. I don’t claim that this plan is the best possible or that it will work for everyone.  I do claim that the vast majority of people who follow different plans will get worse outcomes. Most of my readers will be more interested in the later stages of this plan.  Please indulge me for a while; the beginning lays the foundation for the rest. Starting out Our hypothetical investor – let’s call her Jill – is at least 18, currently earns less than $50,000 per year, and has a chequing account at some big bank.  She has a modest amount of savings in her account earning no interest.  It’s about time she opened a savings account to earn some ...

“Passive investing is power investing.” This line from Richard Ferri’s book The Power of Passive Investing: More Wealth with Less Work is proof that he’s far better at persuading people to use index investing than I am. Who wouldn’t want to be a power investor? Ferri goes through the academic evidence and makes the case for passive investing to individual investors, charities and personal trusts, pension funds, and advisors. The typical individual investor will get the central ideas of this book, but it’s mainly aimed at much more knowledgeable investors. Ferri takes dead aim at the “utter failure of active managers to deliver on their promises of market beating results while enriching themselves with fees extracted from investors who entrust money to them.” “A fund that tracks an index may charge only 0.2 percent in annual fees compared to an active fund with the same investment objective, which may charge 1.2 percent per year.” Over 25 years, these costs grow to 4.9% and 2...

I’m accustomed to reading arguments against index investing. The valid ones tend to point out that few index investors actually stick to their plans. The “other” arguments make less sense but get repeated frequently anyway. Jack Mintz managed to bring a great many of these less sensible arguments together in a recent short article . Here I examine Mintz’s claims. “What happens if the day comes that the entire stock market becomes solely made up of passive investors?” This won’t happen. We’re not close to it now. If we ever got close enough to 100% index investing, active stock picking would become profitable. “The lure of sharply reduced investment fees has enticed millions of investors to shift their portfolios to passive investments.” Calling low fees a “lure” implies that index investors can expect to get caught somehow. Mintz offers nothing to back this up. “There are problems with all this passivity.” I got to the end of the article without seeing anything to...

I received a thoughtful question from reader A.J. concerning how to index: “Hello. I love your website. I've read dozens of books on investing: Paul Merriman, Malkiel, Ferri, Ellis, Bogle, Swedroe, etc. All of these guys disagree on how to index! It is confusing. Some of them wholeheartedly believe in value and small stocks. I've seen their research, it seems very solid. On the other hand, how can anyone predict the future? In Bogle's book, He says that ‘if someone wants to tilt, it would be reasonable to do 85% total stock market fund, 10% value stocks, 5% small stocks.’ So that is what I've done with my US and International holdings. Can I get your thoughts on this? Thanks.” Thanks for the kind words. Without knowing more about your financial life, I can’t advise you directly, but I can tell you how I view my own portfolio. The truth is that we just don’t have enough historical stock information to make confident judgements about fine differences in st...

All the evidence says that the vast majority of us aren’t good active investors. Our choices tend to be worse than random, and we pay investment costs on top of this. Even index investors can have these problems. Here I explain how I’ve tried to automate my investment decisions as much as possible to take myself out of the loop. Investors have many worries. Is now a good time to be buying stocks? Should I be selling now? Are there better mutual funds than the ones I own now? Should I shift more money into bonds? Less? Unfortunately, the evidence shows that most of us make worse than random choices when we try to answer these questions. It’s tough to admit that we can’t beat a coin flip. My response to this dilemma is to ignore my opinions on the market and invest in indexes. And as long as I’m not trying to beat the market, I maximize my returns with low-cost highly-diversified index ETFs. But even after making this decision, investment choices can creep back in. For...

The average return earned by stock investors (before expenses) must exactly equal the average return of the stock market. This is the “humble arithmetic” founder of Vanguard, John Bogle, writes about in The Little Book of Common Sense Investing . Collectively, we can’t be above average because we are the average. To be above average, you have to take money away from someone who ends up below average. However, stock trading is dominated by sharks looking to take your money. Bogle’s simple advice is to give up trying to beat the professionals who dominate stock trading and just buy and hold broad-based index funds. The best index mutual funds and ETFs give you the market average returns at extremely low cost. To beat the market, you have to outsmart professional traders by enough to cover the much higher expenses of active investing. This is a fool’s errand for all but a few of the best investors. Even most professionals can’t succeed at this game. So, why do we try? It see...

My recent post about stock-picking drew a thoughtful anonymous comment explaining the reader’s trouble with indexing. Here is the (lightly edited) comment: “Indexing is counter-intuitive. Doesn't it seem reasonable that if you bought the companies in the S&P 500, then sold off high flying market darlings and poorly-managed businesses, and used the proceeds to double up on the best run companies that you would beat the market? The evidence is no; professional managers who spend 40+ hours a week doing just this cannot consistently beat the index. What gives?” Let’s start with the high-flying stocks. Nothing is flying as high as Apple right now. I have no idea if Apple is currently a good buy, but no doubt some people think it’s destined to drop. Let’s go back to 2000 when Apple was also on a good run. Anyone who excluded Apple from their portfolio then would have missed out on a 25 times increase in its stock price. The truth is we can’t be sure if a high flyer will ...

In a post that inspired many debates among commenters, My Own Advisor asked why we should bother to buy individual stocks at all . In a rebuttal to indexers, one commenter, Pullingmyselfup, asked the following question (lightly edited): “Why is investing the only job, hobby, or activity where people are told not to try?” It’s true that indexing proponents discourage people from trying to pick their own stocks and suggest they just buy an index of all stocks. Golfers can improve through training and practice; why can’t stock pickers improve? The truth is that we can improve our abilities to analyze stocks. But investing offers an alternative not available to golfers. Imagine if you had the option to receive the average prize at the next professional golf tournament without doing anything at all. Instead of hoping for some natural golf talent, buying equipment, spending years building skills, and traveling to tournaments, you just sit on your couch and collect the average pla...

The world of investing simplifies tremendously once you make the decision not to try to beat the markets. Complications melt away when you just try to take what the market offers at very low cost. A Wealth of Common Sense gave a long list of “underrated questions that most investors don’t bother asking themselves.” Here I answer them from my point of view of a DIY index investor. The list of questions is long, but my answers are short. What if I’m wrong? I don’t make bets based on hunches, so it’s hard to go too far wrong. What are this person’s incentives for giving me advice? I ignore forecasters. I listen to people with advice, but I don’t deviate from my current strategy of low-cost indexing, which is incompatible with most advice. What are the all-in costs for my portfolio? Expressed as percentages of my entire portfolio, MERs are 0.08%, my ETF trading commissions and spreads cost 0.02%, and foreign withholding taxes cost 0.10%. My U.S. ETFs don’t report their t...

Few of us like to admit we are merely average in some respect. You’ll hear commentators say that anyone who is just an average investor would be better off owning low-cost index funds. Curiously, it is both indexing proponents and detractors who say this. Digging deeper into the meaning of “average investor” gives some insight the value of index investing. We often hear proponents of active stock-picking or market timing say things like “indexing is fine if you’re just average,” or “why would you want only average returns?” On the other side of this debate, Dave Nadig wrote “you have to accept that you, the investor, are not a special flower. You have to accept that you, the investor, are average.” I see little hope of convincing overconfident stock pickers and market timers that they are merely average until we define “average investor.” After all, I’ve met many of my neighbours. I’m willing to bet that I can comb through companies’ financial statements better than most of ...

A reader, J.H., asked the following thoughtful question about non-market-weighted indexes in Canada (edited for length): “I wonder if it’s wise to not buy a Canadian Index ETF because these funds are so over-weighted in financials and energy equity (as high as 65% in November in some indexes). “I note a more equally-weighted fund, ZLB has beaten the index since its inception, and is doing better than the Canadian index during these unsettled times. It's designed to defend against volatility, but its composition of generally equal-weighted stocks also offers more diversity than a Canadian Index ETF. Index funds seem to be better investments when they have greater diversification, like those mirroring the US market . At least that's the hunch of this investor who is still learning the ropes. “If ZLB is not for some, they could try a strategy of setting up their own Canadian portfolio of equally-weighted stocks.” A great virtue of market weighted indexes is that when a st...

Some of my readers ask why I bother with ETFs when I could save the MER costs and buy the index stocks directly. For example, instead of owning the popular iShares index fund XIU, why not save the 0.18% per year and buy the 60 Canadian stocks that make up the index this ETF tracks? The short answer is that replicating XIU cheaply is difficult. Let’s look at a fictitious example. Dan has a sizable portfolio. His allocation to XIU is $500,000. This fund’s MER of 0.18% costs Dan $900 per year. With such a large portfolio, Dan seems like a good candidate to try buying the TSX 60 stocks directly to save some of that $900. Let’s assume that Dan’s XIU shares are all held in tax-sheltered accounts, such as RRSPs, RRIFs, or TFSAs, so that we don’t have to worry about capital gains taxes. We’ll also assume that Dan pays only $5 per trade and that the spreads on TSX 60 stocks average one cent lost per $50 traded (0.02% per trade). Trading Costs If Dan wants to own all 60 stocks in ...

Passive investing using low-cost index ETFs and mutual funds is rising in popularity. The number of investors who are excited by the idea of couch potato investing is growing every day. However, in a recent conversation I had with Canadian Capitalist, he observed that enthusiastic couch potatoes usually don’t really invest passively. Sadly, I have to agree. Let me start by admitting my own transgressions. It took me many years as a stock-picker before I finally decided that I was better off investing passively. Even then I took my sweet time selling off individual stocks and buying low-cost broadly-diversified ETFs. I still hold one individual stock (Berkshire Hathaway) for less than 10% of my portfolio. I don’t intend to ever buy more Berkshire, but this is still a deviation from index investing. So, I’m not a pure passive investor. But, even if we adopt fairly lax standards for what constitutes passive index investing, few self-described couch potatoes meet the test. Fo...