Why Index Fund Investing Is the Last Thing You Should Do

03/25/2015 11:30 am ET | Updated May 25, 2015

I have a beautiful red-brindled Whippet. He's always scouting around for something to eat or filch surreptitiously. When I am cooking or cleaning up and he comes around, I send him out of the kitchen with the admonition that there is nothing here for a brindled dog.


Investors are hungry for something they can rely on, something they can invest in. Many inevitably choose index funds or index ETFs. At least they realize they can't read a balance sheet or an income statement of an individual company. Good for them, they realize their limitations. However, they opt for the index funds or index ETFs because the media have hammered them with the notion that cheap is better.

We are living in turbulent economic times and what worked five years ago is not likely to work now, in my honest opinion. I used to be a strong adherent of Mean Variance Optimization. No more. Most of the discernable asset classes are behaving too much alike to try to create a portfolio that way. John Hussman recently pointed out that the risk premiums in equities have all been compressed and bonds do not offer a way out at current yields. I believe this has occurred because we have a president who is economically clueless and an almost equally clueless Congress. Every economic policy this president espouses totally disregards facts and history, and, instead, relies on his own ideology. An ideologue controlling economic, fiscal and monetary policy is a very dangerous thing, especially when he proactively lies about his policies to sell them to the unsuspecting under-informed voter.

The actions of this administration, in my opinion, totally eviscerate the value of index fund investing. People who now invest in an index fund are experiencing gut-wrenching swings and wondering why they went down that road. Most index constructs are market cap indexes. This results in over 50 percent of the holdings in the index fund being fully or overpriced. When I hear the Power Shares commercial about "owning the whole sector," I laugh. Where utilities are concerned, I don't want to own the whole sector as most of it will lose value and also return low dividends. I want to only own the best-priced stocks that exhibit below industry debt and above industry dividends.

This "market" is poised for a major fall. The president's policy of re-distribution of wealth has taken a terrible toll on the middle class and small business. The 800-pound gorilla in the room is the fact that many employees that are still employed have lost their health insurance or can't afford to keep it, while the people that didn't have insurance can now get it but can only afford it because of the subsidies given them -- subsidies funded by the taxes of those who can't afford insurance. The amount of workers that have dropped out of the workforce is staggering and all those new jobs touted as being created are lower-paying than the ones that were lost. Since the number of workers relative to SSI recipients is shrinking, a labor participation rate at lows not seen since 1978 doesn't bode well. There are more people working the equivalent of part-time than ever before. The average worker's purchasing power has dropped since this administration took the reins. I believe it is time for an Occam's razor approach for finding solutions. If it doesn't make common sense, it doesn't make sense. There is no common sense in our fiscal policy, in our $18 trillion national debt, in increasing the power of the EPA and other agencies to put individuals into poverty and destroy small businesses, in unelected administrative drones establishing rules and regulations that Congress would never pass. This is pure power usurpation.

The toll I expect is a swift down market move anytime after the Fed announces tightening. Many companies have achieved economic success in the last six years in spite of the efforts of this administration, but I can't see how much longer this will endure. The current earnings reports would suggest my personal and professional concerns are warranted.

So, if you are an individual investor that wants to preserve what you have and grow a little over time, the last thing you should do is invest in index funds or in portfolios built with a one-size-fits-all mentality. Find yourself a contrarian stock picker and carefully piece together a portfolio more likely than not to achieve your financial goals in spite of government: Low priced value stocks with dividends and low debt.

As for the indexes and the economy, there's nothing here for a brindled dog.

Originally posted on Paladin Registry.

About the Author: Henry Schwarzberg is the Principal of his consulting firm specializing in all aspects related to Qualified Plan governance, management and operation; Defined Benefit and Defined Contribution plans; Expert witness services and brokerage transaction/account forensics. He has a Law Degree from Brooklyn Law School and holds the following credentials: AIF, CRPS. Connect with him on Linked In.

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