Is Passive Investing A Blatant Lie?

The other day, I came across an interesting chart.

The chart itself is below, but it is the voiceover that matters as much (or even more) than the visual itself.

That voiceover went along the following lines:

• Passive investing is nothing but an illusion
• It doesn’t work unless you cherry-pick time periods
• And so, successful passive investors are simply lucky

For comprehensiveness, here’s the actual chart in question (you’ll probably need to zoom in):

Invested in the early 90s or 2009?  Thank your lucky stars!

Got into the market in 1955 or 2000?  Too bad, so sad – because passive investing only works for the lucky ones.

I won’t link to the resource itself, a relatively popular investing hub, as I want absolutely nothing to do with perpetuating that kind of misinformation.

The problem is, you are bound to see more and more articles like the one above.

It’s a bear market.  Many people are second-guessing their investing strategies.

And so, it’s a fertile time for all the bad actors with their own agendas.

Sadly, those agendas mostly center around selling you an expensive active investing or life insurance product that can make them a lot of money – all while killing your dreams of enjoyable, wealthy life.

Here’s why.

Intellectual Quicksand

There’s a number of critical issues with the reasoning above.

First of all, the chart does NOT consider dividends.

As I have explained here (see concept #2), there’s an absolutely CRUCIAL difference between price returns and total returns.

Have a look at the chart below to see the impact of dividends on total returns over time:

In fact, if you zoom out you will find that dividends deliver the vast majority of long-term stock market returns over time:

So if anyone shows you a chart that doesn’t factor in dividends, you can tell them to go pound sand.

But that’s just the beginning.

The second factor “experts” like these tend to ignore is that NO ONE invests in their presupposed pattern.

I mean, do you know any people who have never invested – and then wake up one day and buy a million dollars worth of index funds?

And then those very same people will peace out and never put another dollar to work – until they retire.

That’s just not the way real life works.  The vast majority of people out there start slow, investing seemingly inconsequential amounts.

Over time, their investing habit strengthens while their income grows – and so they start investing more and more until they come to the end of their accumulation journey.

Decumulation in retirement isn’t a one-shot event either.  Have you met anyone who clicked on “SELL” the morning after their retirement party?

Equity investments are liquidated over time, in line with one’s spending patterns or safe withdrawal rate assumptions.

Provided the SWR is conservative enough, most people will actually see their portfolios grow even after they retire.

So that is strike 2 against “arguments” like the one above.

The third problem is the assumption on how long your accumulation journey will last.

I’m sorry to break it to you, but if you count on the stock market making you wealthy in a decade, you’re probably in the wrong place.

Sure, I could tell you otherwise.  This blog has a very healthy following but I’m sure I’d have 10x the readers if I kept telling everyone they will strike it rich within 3 years.

Except that… it ain’t gonna happen.

You could get lucky – and build up a solid nest egg in ten years.

This is kind of what happened to all the folks who started investing post-GFC and ramped up their contributions as the decade-long bull run raged on.

But there are also people who started investing in 1999 at the very top of the market.  Ten years later, they would still be nowhere, courtesy of the lost decade.

The ones who didn’t capitulate in 2009 are the ones who are retiring early today with seven-figure portfolios.

The stock market is NOT a ten-year game.  It could be a twenty-year game, but even that it’s not a guarantee.

Where the odds really turn to your advantage is over 30+ year periods.

And while that may seem like a long period of time, the reality is that it’s not.

Even a 45-year-old who is just getting into investing today has a decent twenty-year runway to build up their stock portfolio.

And once they retire at 65, they are likely to have another twenty-odd years of decumulation ahead of them.

In other words, you probably have MUCH more time than you think.

But even that’s not where the problems end.

The Biggest Fallacy

Let me make one thing clear – I hate market volatility just as much as everyone else.  No one in their right mind enjoys seeing 4% drawdowns in a single day.

You can (and should) become accustomed to it.  But you will never enjoy them.

But the reason we put up with the market volatility is that we have no alternatives.

If you know an easier way to make a 10% risk-adjusted return, please shout.  I’m all ears.

Yes, there’s real estate – but there are multiple challenges with real estate investing as well.  For what it’s worth, you can’t DCA into a real estate investment, making market timing much trickier.

And so, it’s easy to throw rocks at equity investing, especially in a bear market like the one we are in today.

But sadly, the people who do that aren’t exactly offering an alternative.  I mean, what are they suggesting?

Should you sit in cash and watch your purchasing power decimated by inflation?

Give your money to an active money manager, who will charge you an arm and a leg and proceed to underperform their benchmark?

Buy an overcomplicated life insurance product that sells you expensive bells and whistles you don’t need?

(Note – you definitely need life insurance, just not the one that comes wrapped with “investments” of any sort)

Or sign up to some shady investment scheme to see your entire net worth wiped out?

Perhaps one day we will discover an even better way to make money.

But until then, low-cost, passive stock market investing is pretty much the ONLY reliable way to compound your wealth over long periods.

Please remember that next time you see a chart like the one above and feel passive investing isn’t working for you.  It will work – but only if you give it proper time.

As always, thank you for reading – and good luck on your journey!