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I'm already a huge fan of the index investing philosophy and have put my money where my mouth is so to speak.

But when discussing it with some other people they brought up some old arguements that I confess I can't really convincingly answer.

Specifically the case studies of Japan in the nineties and the pronlonged recovery of the US indices after the great depression.

How can an index investor be successful in these adverse scenarios?

And to say it won't happen here or can't happen again isn't the type of answer I need.

I need real strategy.
 

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You are confusing different issues:
* active vs passive,
* asset-allocation vs asset-class-rotation, and
* buy-and-hold vs market-timing.

A lot of what is written lumps them together, but they are different decisions.

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Most everyone agrees that passive security selection outperforms active selection, on average, by the amount of its additional costs. The major exception is with small cap stocks where there is more chaff than wheat and active selection pays for itself.

There is also the problem that a lot of the research has used open-ended mutual funds. This is not quite fair because the cash-flows in and out can cause acute problems for managers. They are also constrained by a requirement to stay invested even when they would personally get out.

There is also the evidence that individual investors will have different track records. When brokers' accounts are analysed there is correlation between good results in one period with good results in a later period. Of course some investors just do well when (eg) value stocks are doing well, and do worse when the tables turn.

There is also the evidence, even with mutual funds, that although active management cannot outperform returns, it can reduce volatility.

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I started saving money in the 1970's. I have rotated my major asset class holdings through my life. I don't agree at all with the mantra from 'advisors' that historical averages guarantee future performance. The markets have no memory. I believe this gospel was invented to get advisors off-the-hook for poor performance.

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Buy-and-hold was never intended to mean buy-and-forget or hold-no-matter-what. That this past year has shown that 'advisors' have preached exactly that. This is another gospel invented to get advisors off-the-hook for poor performance.
 

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I'm already a huge fan of the index investing philosophy and have put my money where my mouth is so to speak.

But when discussing it with some other people they brought up some old arguements that I confess I can't really convincingly answer.

Specifically the case studies of Japan in the nineties and the pronlonged recovery of the US indices after the great depression.

How can an index investor be successful in these adverse scenarios?

And to say it won't happen here or can't happen again isn't the type of answer I need.

I need real strategy.
Indexing is not limited to equity markets. You can invest in bond markets, REITs etc. passively.

So, what you are asking is whether stock investing will be successful under all conditions. The answer is clearly no. When investing in stocks you run the risk that future returns will be short of what you expected.

Long periods of poor stock returns are not unprecedented. They've happened before and could happen again. However, there is risk in every investment... even cash and bonds. Bonds can have a long stretch of poor returns and cash can be devastated by periods of inflation. The key then, is to be well diversified and have a backup plan.
 

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I've only been an active investor for about 2 weeks now... and index funds are the route I have taken. After alot of research (much of it on this site) I came to the conclusion that for someone who isn't a saavy investor type (thats me) this was a good strategy. Basically I took a decent amount of cash that was sitting in my "high interest savings account" (a joke) and went with a 25% bonds, 25% int'l equity, 25% US equity, and 25% Cdn equity allocation. Recently I've beefed up my Cdn. and U.S position a bit.

I know things can go south quickly, but I am really quite surprised at how successful I have been with this simple investment. I really feel like a fool for having so much cash sitting in a savings account for so long, not working for me. My appetite for learning about investing seems to know no bounds these days.
 

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You may want to look into some dividend yielding stocks, as in a market that may have a long period of poor returns it could be good to at least get paid to hold the stock.
 
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