Make no mistake about those that espouse the concept of low-cost investing; they are not the altruists they may seem.ETFs

A line from the movie, “The Usual Suspects,” says all you need to know about Jack Bogle and the rest of the index industry shills:

“The greatest trick the devil ever pulled was convincing the world he didn’t exist.”

It may sound like gurus like Bogle are looking out for your investing interests, but what they’re really about is lining their own pockets.

Low-cost investing requires massive scale for its business model to work profitably. The more followers, the greater the volume of investment dollars flowing to the industry.

Never forget that index fund proponents will say anything to support their cause, no matter if the approach is truly appropriate for the individual investor. They have no choice in order to obtain the volume necessary to keep them in business.

In Wintergreen Advisers’ April report, the firm claims that index funds are a hidden threat to investors who believe their funds are broadly diversified. According to the report, index funds have a “dangerously high concentration of risk in their portfolios,” as holdings are limited to a small number of giant companies like Johnson & Johnson, Berkshire Hathaway and Chevron.

Take the index fund industry for what it is: borderline fraudulent and most certainly neglectful.

I say neglectful based on a recent Bogle comment made comparing Wall Street to a casino. His advice: place your bet and walk out.

Hmmm… leave your money with the house and hope that you come out ahead in the end.

Good luck with that.

I get what Bogle was trying to say, because Wall Street shouldn’t trusted.

Market evolution has created what amounts to a game of chance, but neglect is hardly the proper strategy to beat Wall Street.

Bogle also tries to assuage investors from being their own worst enemy. Irrational investors don’t tend to make the right decisions, especially in the chaos of the Wall Street casino.

According to Bogle, then, investors should make no decision at all. Instead, place your bet on an index fund and let it ride, no matter which way the wind blows.

That’s not strategy; it’s a form of neglect.

By owning a basket of stocks that is arbitrarily selected by some outside, supposedly independent agent, there is little regard for basic investment principles, mainly valuation. As we should know by now, having witnessed multiple stock market dislocations in the past two decades, valuation definitely matters.

Make no mistake: You get what you pay for with an index fund, including a big dollop of risk, especially in the current market environment.

Risk is the dirty little secret the index fund industry never wants to talk about. Yet, in this current market environment, risk should be front and center of any investment decision.

Most experts, including investment gurus like Warren Buffett, see forward-going market returns stagnating in the single digit range, at best. Within that forecasted future includes the possibility of a major market dislocation not too dissimilar to prior sell-offs.

Stocks today, by most measures, are stretched (or perfectly priced, at minimum). Does it make any sense to follow an index fund strategy if the risk of correction or worse is so great?

Equity risk taken demands adequate compensation in return.

At market peaks, when future returns are suspect, compensation of single-digit returns is not nearly adequate enough to justify the risk.

In following an index fund, your future gains are likely limited to single digits for many years to come, according to experts.

Why put your capital at risk if a big correction occurs during that time?

The only way to risk big losses due to a sudden and unexpected downdraft in the market is if your returns are well into the double digits. Buying an index fund won’t get you there, but it will further enrich the industry advocates.

The good news: Despite what the index fund industry tells you, by going it alone, investors can obtain adequate compensation for risk taken.

With a few simple tools, a willingness to trade, and a dash of gumption, double-digit returns for Main Street investors are achievable—even in this market environment.

 

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