But what I fail to understand is why anyone would want to take the risk of investing in the stock market – via indexing or otherwise – without hedging the risk of tosoe investment.

Sure markets tend to go up over time, but you live in only one period of time – and if stocks decline (or rise only slightly) over that time span – what are you going to do for money?

Options are the answer to cutting significant risk out of investing.

Brian: Thanks for that link. Hadn’t seen that post yet.

Monevator: Very valid points you have there about (at least potential) advantages that individual investors have. Thank you for bringing those up.

Private investors can do things like move into cash, they can take on risk free of institutional mandates, and they are pretty much uninhibited by having too much money.

Not saying these sorts of freedoms mean stock pickers are likely to beat the pros (most are likely not to) let alone the index (I agree, most of us should track!) but it does expand out the playing field a bit…

But passive indexing does not.

The only argument for not changing your stock allocation in response to big price swings is that valuations don’t matter much. If the market is not efficient, that one goes out the window.

Rob

I found a post over at canadian capitalist who also comes down to the same conclusion: http://www.canadiancapitalist.com/efficient-market-theory-and-indexing/

Market timers and stock pickers would have to argue that: with costs being equal, that they can successfully select and buy undervalued stocks and sell when they are overvalued. Something which I think has been argued that is difficult to do even for professionals.
They could also argue that indexing into inefficient markets, leads you to “automatically” invest in an asset which is over valued.

This may sound cynical, but I believe the purpose of the financial services industry is to make themselves rich, while making their clients “rich enough” to keep them from doing the work themselves.

There are many reasons to assume that financial planners or brokers don’t always act in the client’s best interest (to make the client money) and those reasons have been explored in books like Liar’s Poker, or Dreman’s Contrarian Investing.