What are the arguments against index investing?

My 2 main arguments against index investing are a) it is a pure gamble i.e no skill involved, no thinking, you are just betting and hoping and crossing your fingers that the index will go up at least by the time you need the money in 20/30/40 years...and b) you're settling with being 'average', mediocre, part of the crowd.

 

except very few of the crowd buy an index fund and hang on through thick and thin for 30 years. Those that have did better than those that attempted to beat them.

The gamble is that the 500 stocks in the S&P will someday make money for the owners.

 

Except that over time the equity markets have done pretty well.

And average / mediocre has typically outperformed most professionals.

 

kind of pathetic isn't it? Average beats pro

 

There is no end to gullability. Making money in the stock market is about like trying to lose weight. Everybody has a simple plan for $200 that beats eating too much.

 

The only interesting argument against index investing that I have heard is that index investing hinders the market darwinism. Instead of companies being rewarded with higher stock prices (lower cost of capital) for good performance, they are rewarded for being big (in the case of the SPX) or just being anointed (in the case of the DOW). This can have a destabailizing effect as stocks get more correlated and valuations converge where they shouldn't.

 

Maybe you could beat the market with going Dogs of the Dow?

 

Past twenty five years in Japan has been a losing proposition. In fact, there are a number of similar sized periods in US stock market history in the last century where the index has gone nowhere. Imagine some guy at age 40 deciding to stick all his money into an index fund (because stocks always go up over time right??!!) for his retirement and then finding out at age 65 the value of the fund is at the same level as when he bought it. Some retirement!

Mad gamble imho.

 

Heck that sounds like the same argument against 7 years of ZIRP.

 

You are correct...Instead they typically get out at the bottom and buy back in at a euphoric top...Now that does sound like a good argument in favor of blind index investing (which it may well be)...but I'm with Visaria in this argument...we've had three equity bubbles in succession over just the past 15-17 years...this latest one required 7 years of ZIRP, three rounds of QE and near constant collaboration between central banks to manage...the notion that the S&P can repeat the past 30+ years performance seems a bit far-fetched.