Reconsidering the "Total Market" ETF

Jun 24, 2010 by

Despite all of the various people who have advocated investing in the “total market” ETF, I think that people should be very cautious about doing so. John Bogle and friends have claimed that the safest way to invest is to just buy an instrument that mirrors the performance of the market. This is a prudent thing to do if and only if you expect that the market will perform well, on average, over the long term. If you have strong reason to believe that the market will perform poorly over the long term, this strategy is very bad. If the market has permanently changed for the worse, you are far better off investing in something that has the inverse performance of the market.

Over the last 5 years, an investment in the S&P 500 was not profitable:

The Japanese have had it even worse than we have. In 2010, the NIKKEI 225 was at around the same price it was at in 1985, not accounting for inflation! Since 1990, it has been on a somewhat downwards trajectory:

Meanwhile, India’s SENSEX index has nearly tripled in the last five years:

The point I am trying to make is that if you invest in the “total market”, there is no guarantee that your investment will do well. If you think your market has some serious flaws, you are far better off putting your money somewhere else for the time being. All the studies that talk about the long-term performance of the U.S. market tend to look at events over the past eighty years or so. In the scheme of things, this is not a very long period of time. As looking at the cases of Japan and India show, it is possible for different countries to have very different performances over the long term. Over the past decade, the U.S. market has barely budged, while the Indian market has soared and the Japanese market has tanked. Slow, steady, compounding performance is far from certain.

1 Comment

  1. Qwester

    Your observations are correct but neglect the corrosive effect of inflation and the opportunities presented during the upslope periods. The Japanese have cultural conflict with capitalism inasmuch as there is no great demand yet for pure riches. The adherence to respect for the dangers of the “the market” prevent the kinds of bubbles that we here can participate in. Foreign factors influence the Japanese market, quite the opposite of India where the varied culture unleashes adventurous participants.

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