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):

Index performance

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:

Stock Market Investing - Price vs. Total Return

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.

S&P 500 annual performance

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.

Annual investment in the S&P 500

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!

About Banker On Fire

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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16 thoughts on “Is Passive Investing A Blatant Lie?”

  1. A nice timely reminder when it seems the world is entering hyper-negativity mode.

    Just yesterday I found myself questioning whether I’m doing the right thing (I plough 40% of my take-home per month into VWRL). So what I did was to go back through some old articles which I remember and to just remind myself that these market drops are inevitable and, like you say, the people that held following the 07/08 crashes and kept buying are the ones reaping the benefits today.

    Not wanting to be too optimistic, but this could well be the opportunity of a lifetime.

    1. Banker On FIRE

      Glad you found it helpful!

      I’m not sure how long the current situation will last but what is definitely true is that buying today is a better deal than buying 6 months ago.

      Perhaps there will be an even better deal in another 6 months – nobody knows. But either way, it’s money well invested.

      Stay the course – I certainly am.

  2. A well timed and thoughtful reflection on the madness that surrounds us at times of challenge.
    I really enjoy your blogs – thank you.

    1. Banker On FIRE

      Cheers David, appreciate the kind words.

      Not an easy market environment but our actions during these times determine our long term success as investors

  3. Nice article BOF and a timely reminder that the time to buy is in a bear market – NOT SELL! Who knows how long this one will last but it’s time to sit on the hands.

    Interesting that anyone under about 45 won’t have seen this type of market before – when both stocks and bonds fall at the same time driven by inflation way above interest rates. In the 70’s I was paying 16% interest rate on a mortgage and inflation hit 25% – about a 9% differential – not that much different from today………

    1. Banker On FIRE

      Indeed. It’s not what you do in a bull market – it’s what you do in a bear market.

      And yes. There’s a whole generation of folks who haven’t yet experienced 6%+ interest rates. Will be an interesting ride and I hope people won’t get wiped out.

  4. Sadly, maybe we have another lost decade of returns.

    But, it was great while the good times lasted! And I’m hopeful inflation will turn the corner around August 2022.

    Time to re-retire soon!

    BTW, if you would like a copy of my upcoming book with Penguin Random House for review, please let me know! Will happily email or mail you one. Thx


    1. Banker On FIRE

      Possibly, though I also don’t think we are in for a prolonged inflationary period. Time will tell.

      And yes, would love the book. Could you pls send to bankeronfire at gmail dot com?


  5. The hens are on the loose and the wolves are out!!! Sure bear markets suck, but passive investing or really ANY solid diversified investing works 100% of the time in the long-run. We just gotta be patient. As Yoda says “Patience you must have, my young padawan.”

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  8. I couldn’t agree with you more. I didn’t start investing until 1997. Despite what the markets were doing, I didn’t sell and kept investing. I now have a very comfortable retirement and no regrets. Keep on with the sensible investing tips. Younger generations need good advice.

    1. Banker On FIRE

      Very impressive. Not many folks managed to sustain investing through the lost decade of 2000s.

      Well done for staying the course!

  9. Slow & Steady wins the race

    Hi Damien. I saw this advert on BING and it made me think of you and this article. It also made me laugh, but there is an aspect of it that is quite scary, as some will fall for it. I didn’t click through on the link as I know if this person had found that secret, they wouldn’t be giving it away for free to everyone. Here is the words in the advert:
    “Buying Tesla, Apple, Amazon, Bitcoin, or any other anything else – right now –is a DEVASTATING financial mistake.
    One of America’s #1 trading millionaires has joined the ranks of the top 1% of wealthy…by IGNORING 99% of the entire stock market.
    Because within the 6,000 different stocks on the market to choose from… Hides ONE very special stock.
    He calls it, “The One Stock Retirement” because it’s been used for years (through ANY market condition) to catapult his wealth –closing gains like 373%, 228%, and more –time and time again.
    Collecting 37-YEARS of normal market gains… in just 8 days.
    Today, he’s demonstrating this trade and revealing the ticker, click here to watch.”

    1. Banker On FIRE

      Of course… and that one stock went unnoticed by the armies of research analysts and investors for decades 🙂

      Appreciate you sharing, always get a good laugh out of these

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