Millionaire Expat. Andrew Hallam

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СКАЧАТЬ age our money] who are above average…and those of us who put our money in index funds say, “Thank you very much.”⁹

Daniel Kahneman, another famed Nobel Prize–winning economist, echoed the sentiment during a 2012 interview with the magazine Der Spiegel:

“In the stock market…the predictions of experts are practically worthless. Anyone who wants to invest money is better off choosing index funds, which simply follow a certain stock index without any intervention of gifted stock pickers…we want to invest our money with somebody who appears to understand, even though the statistical evidence is plain that they are very unlikely to do so”.¹⁰

      Merton Miller, a 1990 Nobel Prize winner in economics, says even professionals managing money for governments or corporations shouldn't delude themselves about beating a portfolio of index funds:

Any pension fund manager who doesn't have the vast majority—and I mean 70 percent or 80 percent of his or her portfolio—in passive investments [index funds] is guilty of malfeasance, nonfeasance, or some other kind of bad feasance! There's just no sense for most of them to have anything but a passive [indexed] investment policy.¹¹

In the documentary program Passive Investing: The Evidence the Fund Management Industry Would Prefer You Not See, many of the world's top economists and financial academics voice the futility of buying actively managed funds. But as the title suggests, it's the program most financial advisors will never want you watching.¹²

Financial Advisors Touting “The World Is Flat!”

      Your financial education is the biggest threat to most globetrotting financial advisors seeking expatriate spoils. Consequently, many are motivated to derail would‐be index investors from gaining financial knowledge.

       Self‐Serving Argument Stomped by Evidence

Here is one of the most common arguments you'll hear from desperate advisors hoping to keep their gravy trains running:

      Index funds are dangerous when stock markets fall. In an active fund, we can protect your money in case the markets crash.

      This is where a salesperson tries scaring you—suggesting that active managers have the ability to quickly sell stock market assets before the markets drop, saving your mutual fund assets from falling too far during a crash. And then, when the markets are looking safer (or so the pitch goes), a mutual fund manager will then buy stocks again, allowing you to ride the wave of profits back as the stock market recovers.

      There are problems with this smoke screen. First, nobody should have all of his or her investments in a single stock market index fund. They should own a global representation of stocks and a bond market index for added stability. Bonds are loans investors make to governments or corporations in exchange for a guaranteed rate of interest.) If the global stock markets dropped by 30 percent in a given year, a diversified portfolio of stock and bond market indexes wouldn't do the same.

      Have some fun with self‐proclaimed financial soothsayers. Ask which calendar year in recent memory saw the biggest stock market decline. They should say 2008. Ask them if most actively managed funds beat the total stock market index during 2008. If they say “yes,” you've exposed your Pinocchios.

SPIVA published detailed proof. In 2008, US stocks plunged 37 percent. But despite that horrible year, the US stock index beat 64.23 percent of actively managed US stock market funds.¹³

Global stocks fell 40.11 percent in 2008. Yet the global stock market index still beat 59.83 percent of actively managed global stock market funds during that calendar year.¹⁴

Warren Buffett wagered a $1 million bet in 2008, unveiling more damning evidence against expensive money management. A few years previously, the great investor claimed nobody could handpick a group of hedge funds that would outperform the US stock market index over the following 10 years.

      Hedge funds are like actively managed mutual funds for the Gucci, Prada, and Rolex crowd. To invest in a hedge fund, you must be an accredited investor—somebody with a huge salary or net worth. Hedge fund managers market themselves as the best professional investors in the industry. They certainly have plenty of flexibility. Hedge funds (according to marketing lore) make money during both rising and falling markets. Managers can invest in any asset class they wish; they can even bet against the stock market. Doing so is called “shorting the market,” where fund managers bet that the markets will fall, and then collect on those bets if they're right.

      Buffett, however, doesn't believe people can predict such stock market movements, charge high fees to do so, and make investors money.

Hedge Fund Money Spanked for Its Con

      Grabbing Warren Buffett's gauntlet in 2008, New York asset management firm Protégé Partners bet history's greatest investor that five handpicked hedge funds would beat the S&P 500 index, a large US stock index, over the following 10 years. Protégé Partners selected five hedge funds with index‐beating track records (each was actually a fund that contained winning hedge funds within it). But historical results are rarely repeated in the future.

      The bet began in 2008. Stocks crashed that year, so it should have been a great year for hedge funds. If the fund managers could have predicted the crash, they would have pulled far ahead. But that didn't happen. In the years that followed, the S&P 500 ran like an Olympic Kenyan marathoner from a pack of pudgy men.

By January 2018, Buffett had won. Vanguard's S&P 500 Index gained 98 percent. The hedge funds were up just 24 percent. In fact, none of the funds of hedge funds kept pace with the S&P 500.¹⁵

If you've read Simon Lack's book, The Hedge Fund Mirage, these results won't surprise you. He says hedge funds produce horrible returns. Lack reveals that a portfolio balanced between a US stock index and a US bond index would have beaten the typical hedge fund in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, and 2011.¹⁶ After his book was published, hedge funds continued to underperform the balanced stock and bond index in 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 and 2020. In other words, a balanced stock market index beat the Masters of the Universe for 18 straight years…and counting.¹⁷

      In fact, the hedge fund managers' shortfall was so poor that the managers could have worked for free (not charging their usual 2 percent per year plus 20 percent of any profits) and a balanced US index fund would have still given them a beating.

      The global stock market index (which includes US and international stocks) also beat hedge funds to a pulp. Consider the hedge fund industry's failure to beat portfolios of market indexes. If they can't do it, what chance does your financial advisor have? If your advisor has Olympian persistence, you might hear this:

       You can't beat the market with an index fund. An index fund will give you just an average return. Why saddle yourself with mediocrity when we have teams of people to СКАЧАТЬ