Index investing will work, if you live for a long time. The problems are, we do not live infinitely, and the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people).
What I think will work - not claiming that it will actually work - based on history:
Invest in companies that are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend. Yes, you need to identify the company. Yes, you need to take decisions: INTC vs AMD (1980s), YHOO vs GOOGL (2000s). But it gives you a much better chance of seeing a profit in your lifetime than index investing. You can still index invest, but only an amount you can "set and forget". This gives you the best of both worlds.
Edit: (1) What I posted above is for long periods of no movement of stocks except downwards, as I believe we are going to see. (2) Index investing will work eventually and that is what I said above as well. The point is, the time period required for that. (3) I thought of posting this on my blog tomorrow, but it is past midnight here, and I wanted to see what HNers think. It is interesting to see the different opinions. Time may change some of your opinions (not about "index investing will not work" - that is not what I said above - but rather, about the protection offered by diversification, and what diversification actually means. Also, quoting this part again: "the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people)").
Your strategy sounds like "pick winning stocks"? A strategy which has been show to produce (on average) worse returns than index investing.
Index investing has produced a ~200% return in the past 15 years (from 2007 peak to now). Not sure what you mean by "a chance of seeing a profit in your lifetime".
There's a third strategy of "index minus bullshit stocks" where you would include both INTC and AMD stocks for risk hedging, but would leave out things with questionable sustainability like Uber and Netflix that otherwise made it into the index due to the speculative value.
More or less. Of course, I am advocating to leave out any company where it does not fit this criteria: " are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend".
On other hand it also avoids Tesla when it inevitably crashes to same ballpark as other automotive companies... No I really believe it is nothing special and will eventually come down.
Kind of the opposite of diversification though. Houses burn down and neighborhoods change, sometimes for the worse. I knew someone that bought a house in 1972 for $70,000 and sold it in 2015 for about $70,000. Real estate is not all roses and candy.
All 20-30 years? Believe it or not, the history of investment spans more than the last 25 years. Also, there are some questions regarding the liquidity of ETFs during a major crash/selling session. It’s possible there could be a feedback loop of selling to deal with cashing out that results in price of the ETF going below net asset value.
Index investing has really only existed in common practice since the 1970s. You can simulate back further and do imaginary index investing, but we really only have 50 years of actual history with it. It's a very young experiment.
One thing that a lot of people are worried about is if the surge of people and money getting blindly pumped into broad basket index funds as if it was a savings account (because those have negative real yield) will itself distort the market in weird and unpredictable ways. It's entirely possible that it breaks the entire system and creates the mother of all crashes.
This, pretty much. Whenever a new trend comes up, be it Bitcoin or index investing (both of which are poles apart in terms of risk), passionate people will defend them passionately. Good on you all. I posted it hoping to see HNers' original or novel thoughts about this (along with the expected defending of index investing).
It's pretty tough to figure out if there's over-exposure in index investments, and tougher still to untangle the expected fallout of that problem, if it exists. Some people have talked about it, and have been shouted down of course.
I've done a decent amount of reading on the topic and think I'm barely knowledgeable about the surface of it. I guess that's how it always is, though.
People burying their heads in the sand and thinking that index investing has no hidden black swans are the ones to be most scared of, though.
What I think will work - not claiming that it will actually work - based on history:
Invest in companies that are generating a lot of cash and a lot of profits, have a moat/USP/technology advantage, and are at the forefront of where the world is headed in terms of trends, or at least are following a sustainable trend. Yes, you need to identify the company. Yes, you need to take decisions: INTC vs AMD (1980s), YHOO vs GOOGL (2000s). But it gives you a much better chance of seeing a profit in your lifetime than index investing. You can still index invest, but only an amount you can "set and forget". This gives you the best of both worlds.
Edit: (1) What I posted above is for long periods of no movement of stocks except downwards, as I believe we are going to see. (2) Index investing will work eventually and that is what I said above as well. The point is, the time period required for that. (3) I thought of posting this on my blog tomorrow, but it is past midnight here, and I wanted to see what HNers think. It is interesting to see the different opinions. Time may change some of your opinions (not about "index investing will not work" - that is not what I said above - but rather, about the protection offered by diversification, and what diversification actually means. Also, quoting this part again: "the average person does not have the stomach to see their investment going down for years, unless that investment is small enough to tolerate (in which case it is not enough to make a big difference, for most people)").