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Let me officially state that Indexes probably do return 10% per year on average but that doesn’t mean you’ll be getting that return personally.    The assumption that is made is that a large lump sum of money is invested at period x and 30 years later that lump sum of money is worth x * 30 * 10% ^t.   The often quoted myth also makes certain assumptions about individual investors such as:

An investor will never touch the money invested in an index fund.

Let’s face reality, most people end up cashing out their 401k after they leave an employer.   Most people end up borrowing or withdrawing some of their money at some point in their life for a reason or two.

An investor will make consistent and permanent contributions to an index fund to dollar cost average over the long term.

Let’s face reality, most people will change their job at least four or more times over the course of a lifetime.   One 401k will get rolled into another 401k and the investment structure and fees are not always the same much less the “lost” time in between jobs.  Suppose you are unemployed for 6 months, not exactly dollar cost averaging are you?

So what’s my beef in with index funds?    I actually don’t have any problems with index fund except for one big fundamental issues:

Index Fund creators and sellers have a huge incentive into steering you into them.   The most valuable incentive is information arbitrage.   Let’s run through some bean counter math:

If you have a working population of 50 million people and we assume that 50% are making 401k contributions and we assume that each are contributing 6% of their salary which we assume is an average 50k/year then that means that:

Each week, an index fund manager can expect inflows of about $300 million biweekly.   There’s some math that can go into the withdrawals but let’s keep this simple.

So if you absolutely knew that you would have $300 million coming in every other week and you knew that the money would be destined for an index fund how would you arbitrage that information?

You can get a spreadsheet and use a pivot table to play out any scenario you want.   One scenario that I would definitely advise you to make is the one where 78 million boomers retire and stop contributing 401k money into the system.  I think when you do that in any number of ways the implications will terrify you.