5 Problems With Index Funds – Take Responsibility For Your Financial Life

If you want to be average – don’t read this post or watch the video (article below)!

It is time to really stand up against the crazy index investing mania where people hand over the responsibility for their financial life to someone else – in this case the market. A few decades ago, we used to call such behavior communist. The 5 dangers:

  • Not thinking is not good because you fail to learn and grow. Therefore, you miss on so many other opportunities!
  • By not taking responsibility for your own financial wellbeing, you’ll get the average!
  • Financial atrophy!
  • What has worked in the past 3 decades doesn’t have to work in the next 3!
  • It is possible to beat the market – especially this market – and it is even easier to reach amazing investing returns overall in a life!

Mindless behavior

A big chunk of the money going into investment funds and stocks today is directly invested into passive investment vehicles. Why? Because that has been working well over the past 35 years, requires no effort and is heavily promoted.

However, when something in finance is taken as granted, it usually becomes dangerous. Let me show you something else. Since 1985 the S&P 500 price to earnings ratio – the factor that actually determines your long-term investment return – went from 7 in 1982 to the current 24.

Figure 1 S&P 500 price to earnings ratiosandp 500 pe ratio

Source: Multpl

If I would put a PE ratio of 7 to the current S&P 500 earnings, the S&P 500 level would be at 857.87, which implies a 69% decline. Sounds impossible? Well, stocks would just be back to where those were in 2009, 2002 and 1997.

Figure 2 S&P 500 in the last 20 yearssandp 500 20 year chart

Source: Yahoo

So, we have past examples of how bad it can get and as communism didn’t end well, I believe this also won’t end well. Even if it ends well, you can do much, much better.

Be better than the average – especially as the average is not thinking

Investing in index funds will give you the average return – but since when is the average ok?

If you have kids, do you want them to be average? Why do you want them to go to the best schools, why do you work hard to give them the best opportunities and teach them to be the best they can be?

The same is with finances, it is easy to just accept the main herd mentality and transfer the responsibility to someone else. But, why not work to make your investment returns the best they can be for you?

Financial atrophy

Here we come to the most important thing of all – laziness and atrophy!

If you do not seek better investment returns for lower risk – your investment brain goes into cerebral atrophy, which means it won’t be able to recognize an opportunity when it comes to you, wherever it might come from – stocks, real estate or business!

I am amazed by people buying real estate – which is usually the biggest purchase of their live – and looking at only two properties. They will spend 20 years working to pay for something they bought in one day. Similarly, people save at 1% or invest in index funds while having a double digit interest rate on their credit card debt.

Index investing is just another fad

Vanguard was founded in 1976 and got traction after 1982. That year is not random, it is the year when interest rates started declining and debt burdens increasing.

Figure 3 Effective federal funds rateeffective federal funds rate

Source: FRED

Asset prices are correlated to interest rates. If you can get a yield of 15% from the Government, you will expect a 20% yield form stocks which translates into a PE ratio of 5. There has been a strong rising tide for the past 35 years in the investing environment that propelled index funds and all asset prices. As interest rates increase, thinking will become more and more valuable because there is a big difference among real asset values.

Yes! You can beat the market and do even better

Now, people say it is impossible to beat the market – well, I strongly disagree – I have been beating the market for the past 16 years now as my average investment returns have been around 18%, not counting the money made in real estate and businesses, because I simply look for opportunities.

Let me share with you what Buffett has to say about this:

The question is whether you want to be the average or you want to be the 1% or 2%. I know for myself that I have been the 1% in the past and I want to continue being!

Put in the effort

So, please, put in the effort – it will change your life in so many ways that you will not believe what has happened, not only on the financial side. This world would be such a better place if we would just renounce being average! Let’s all be the best we can be – and tomorrow the world will be much better.

Take responsibility for your financial life and just please look at what you are investing your money it!!!!!!! And, if you still like index funds, ok! Keep going, but please take a look!

I’ll do my best to help those who want to be better than the average to reach that. Somebody has to be better than the average so better be us, as 99% of people invest like the average it is not even a tough choice.

Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.

Robert Frost – source: Poetry Foundation

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