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Passive Investment Strategies Make
$ense.
Life is full of uncertainty and so is the stock
market. You can reduce market risk and save on costs by indexing.
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 Isn’t it
true that indexing only works for U.S. large company stocks?
No. Indexing works well in all
asset classes. Passive investors will actually incur less transaction
costs, even given the reduced liquidity of small companies or emerging
country stocks; in part because of less turnover. It is very difficult
to beat a passive strategy.
I don’t
believe in the efficient market hypothesis. Why would I index?
Costs, costs, and costs. Don’t believe
that in “less efficient” markets, active managers can provide investors with
superior returns. In fact, it is harder for them, due to less liquidity and
higher transaction costs. The results speak for themselves: passive investors
still have the edge.
(See
Standard & Poor’s Indices Versus
Active (SPIVA) Funds Scorecard)
What
about active managers who have beat the market over many years?
Statistically speaking, it is to be expected that some active managers
will beat the market,
even by a significant margin. However, active managers consistently show
the tendency to "regress" or become average. Too often, any
“outperformance” measured against the S&P 500 can be explained by their
exposure to a particular asset class, not superior stock choice. If you
use a more appropriate index, such as small company or value, their
seemingly superior performance disappears.
Index
funds provide no protection in market downturns. Why would I use one? Because
no one
knows
in advance the best
time to get out of stocks - or back in. In fact, recent mutual fund data clearly shows that
active managers have not been able to add value in down markets either.
Reducing internal cost, having an appropriate asset allocation among
dissimilar asset classes, and periodic portfolio rebalancing, is the far
better solution for handling market downturns and taking advantage of
subsequent recovery.
Isn’t
index investing just another new theory? I’ve heard data doesn’t support
it. Not at all. Indexing has been used for several decades
now. The evidence in favor of a passive strategy is actually so
overwhelming, that the burden of proof rests with traditional active
managers to justify their contribution in view of their higher costs and
greater uncertainties. After looking at all the facts, the shrewd
investor recognizes that there is no other conclusion: indexing wins!
To
contact us:
For questions or comments about
this web site, its content, or to report viewing problems:
learnmore@indexingwins.com
[1. Why indexing?] [2. Inside an index] [3. Evidence it works] [4. Making the choice]
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