System of a drawdown

My wife and I don’t usually get to have lunch together.

She’s a busy bee, doing all kinds of crazy things in the lab (she’s a molecular biologist).

But, recently, the opportnity came up so we both jumped on it.

Went and got ourselves some good food truck nom noms.

Didn’t realize this until after the fact but…

The food trucks were parked right outside of a major (like, nationally-known) investment firm that sells index funds.

Anyway, we sat down at a nearby picnic table and… failed to eat in peace.

A couple of bees decided it was also lunchtime and so kept buzzing around us… beeing all crazy… trying to eat our food.

Bunch of mooches.

Anyway it got me thinking about how crazy passive investor fanboys (and fanghouls) are.

Here’s what I mean:

Chris over at Capitalist Exploits did a nice write up earlier this year about the sheer lunacy of index fund investing.

Lunacy?

Yeah, lunacy.

Because index funds are VERY mechanical, and follow VERY strict buying and selling rules, they telegraph EXACTLY what they’re going to do before they do it.

And… as a result… savvy traders “front-run” them on every trade.

The savvy investors make 5% to 8% in 10 days and… index fund investors eat the cost through a higher initial buy-in price.

There was a study done not too long ago that figured out what the “soft dollar” cost was for index funds having to buy their shares from other investors who were effectively front-running them…

Those costs added 0.20% to 0.30% to the normal expenses of index fund investing, depending on the study. It doesn’t sound like much, but it’s at least 111% higher than the advertised cost of most index funds. Compound that over 20-30 years and it throws off all those neat and tidy spreadsheets everyone is drooling over in the popular personal finance forums.

This isn’t a new phenomenon, either.

It’s been going on for the past 17 consecutive years (at least)… about the time index fund investing became REALLY popular.

This is why I find it amusing when the fanboys fondle their 0.05% expense ratio.

It’s not as simple as finding a cheap, passive, strategy kids.

In fact, I’d argue no such thing exists.

It takes thought, discipline, control, a little bit of skill and… some insider knowledge on how the industry works to become a good investor.

Most people aren’t cut out for it.

But, the beautiful thing is… the stock market is open to everyone willing to learn.

Of course, there are simple strategies almost anyone can learn fairly quickly to grow their savings that DON’T rely on investing.

More on that when you join the email list.

David Lewis

This post brought to you by //The Rogue Agent//. David has been a life insurance agent, and worked with some of the oldest and most respected mutual life insurance companies in the U.S., since 2004. Learn more about him and his business, here.