Whether you’re swayed by the academic theories against active investing – or just the abundant proof showing most fund managers demonstrably fail to beat the market – the case for index investing is overwhelming.
No wonder the lucrative active fund industry has been battling indexing since the latter was introduced in the 1970s.
Jack Bogle, who as the founder of Vanguard group did so much to popularise index funds, even saw his competition decry passive investing as un-American!
It didn’t work.
Today Vanguard is one of the largest managers in the world by assets under management (although crucially, with its low-cost index funds it makes much lower margins on those assets than its more active rivals).
Fidelity, another big player in index funds, is also high up the rankings.
Index funds still on the rise
Yet despite the success of Vanguard, Fidelity, and iShares here in the UK (which is now owned by the giant Blackrock), overall active investing still has a bigger market share than passive investing.
That seems incredible, if you just consider the evidence we’ve seen in this video series from Sensible Investing.
Clearly still more people need to be hear the somewhat counterintuitive case for index funds, as outlined in the next video.
It features loads of different voices, ranging from John Redwood MP to Merryn Somerset-Webb to Monevator favourite Larry Swedroe:
As the video points out, none other than market-beater extraordinaire Warren Buffett has repeatedly made the case for index funds.
Buffett famously said:
“When the dumb investor realises how dumb he is and buys an index fund, he becomes smarter than the smartest investors.”
Just think about it.
One of the world’s greatest active investors – one of the few with any kind of long-term record of success, let alone Buffett’s 60-year streak – is effectively telling you not to bother even trying when it comes to active investing.
It’s a bit like Jamie Oliver telling you to keep out of the kitchen, for your own sake.
Do as he says or do as he does?
I believe that for all his folksy sayings about being greedy when others are fearful and so on, Warren Buffett – an investing genius – knows just how hard it is for most people to beat the market.
Tens of thousands of the world’s smartest and best-paid people still try every day. Most fail after costs.
Will you really do better than them?
If you want to invest actively for some other reason (I pick stocks myself) then fair enough.
But don’t do it because you think you’re the next Warren Buffett, or because you think it’ll be easy to beat all the other wannabe Buffetts out there.
The chances are you won’t even beat Buffett’s best bet – a cheap index fund.
Check out the rest of the videos in this series so far.