Watching active traders talk is a little like viewing a car wreck at times – it is painful, evokes sympathy, but can be hard to ignore. When markets go haywire, some common threads emerge among individual actively-trading investors that bring home the beauty of passive indexing beyond just holding parts of the stock market.
Everything is Down! This is a sentiment often seen on forums like Morningstar and in article comments on sites like SeekingAlpha. As an indexer, the first thought is often: what are they talking about? Bonds are up – especially intermediate- and long-duration Treasuries held in many (likely most) passive portfolios.
Everything is Down … Except Gold! This shows off the same bias, and illustrates that people even think about gold before they think about bonds – most indexers would agree that the stock-versus-bond (or: equities versus fixed income) split is the first and most important step in designing a portfolio. Gold comes much later, if at all.
Shorting the Market is the Solution! Again, this equity-centric mentality reveals that many a trader would prefer to still make all their bets in terms of equities, even if it means higher costs, and speculation, rather than balancing and re-balancing a sensible portfolio where all components stand to make gains (or at least break even) independently.
That’s It, I’m Getting Out of the Market! The expression ‘going to cash’ sounds like a flight to safety, but it isn’t. By the time ‘the markets stabilize’ it is too late to get back in – you forever miss the run-up that brought it back up to ‘acceptable levels’ again.
But Bonds Are in a Bubble! Often when equities go down, bonds go up – again: flight to safety makes this particularly true for Treasuries. Are they thus in a bubble? Not necessarily – the markets have determined equity markets to be risky, so safety comes at a premium price. For someone who buys, holds and rebalances, though, this ‘problem’ largely solves itself, since such investors are using their ‘winnings’ from bonds to buy ‘losers’ in the form of stock market index funds.