Passive Index Investing is Boring. And it’s Spectacular.




After many years of data collection, passively managed index funds have outperformed their actively managed mutual fund counterparts. A large part of that is the significantly lower fees they command. Another big component is that humans (even the “experts”) are often wrong (and make bad decisions when under duress).

Furthermore, study after study shows that those who are less active with investing perform better over time. Even arguably the best investor of all time, Warren Buffett, advocates that amateur investors passively invest.

Why?

Because emotions like fear and excitement are your own worst enemy in investing. They lead to poor snap decisions, short-sighted views, and often doing precisely the opposite of what you should be doing (selling large amounts in moments of fear and buying large amounts in moments of greed).

passive-index-investing-is-boringMost of the financial services industry despises the ascension of passive index investing because it drives investing fees (and their profits) down. They have done everything they can to dissuade it. And in a number of ways they’ve been successful. A shocking 70% of fund assets are still active versus passive, believe it or not. That number is shrinking, but not fast enough.

Some fund providers have reluctantly followed Vanguard’s model because they have had to in order to avoid becoming completely obsolete. And they’ve been grinding their teeth about it the whole way.

So I thought it was funny (and sad and disappointing) that Time’s Money magazine would publish an article that railed against index funds because, and I quote,

Sure, index funds are a way to get a return that’s above average for all mutual funds. But they’re boring. Make that B-O-R-I-N-G. You’ll get dividends and capital gains (or losses) almost equal to what the index produces. As a long-time investor, I still crave a little drama and excitement.




That commentary was from Allan Sloan, a 71 year-old former editor of Forbes, a magazine that has greatly benefited from active investing advertisements over the years.

Sloan goes on to state,

What I suggest you do as a newbie or almost newbie investor — again, if you’ve got the time and inclination — is to put the bulk of your assets into index funds or target date retirement funds (which we’ll discuss in a future column), and play a little bit with a small part of your portfolio.

Hmm… How many, “Come on, try a little bit, it will be fun!” pitches end up with a happy ending?

Readers – learn from my failures and the failures of millions of wannabe stock-picking-savants. As someone who has tried betting on stocks and actively managed mutual funds, I can attest that there is some fun, excitement, and drama. It’s the same kind of fun, excitement, and drama that you get when rolling the dice at your friendly neighborhood casino. Over-active management of investments has a very similar allure to gambling. And often times, it produces similar results. I lost a crapload of money, most investors who go that route do, and you probably will too.

You know what I think is fun and exciting?

  1. Matching the performance of the market as a whole, and not wishing you had.
  2. Paying nearly nothing on fund management fees and trades.
  3. Beating the performance of actively managed funds and your peers who like to bet on stocks and actively managed funds.
  4. Not getting discouraged from picking losers or poor market timing and quitting investing altogether.
  5. Sleeping well at night because you have less risk with a diversified investment allocation.
  6. Watching your investment portfolio and net worth grow to new heights over time, with no effort required.

Boring for the win!

Related Posts:

6 Comments

  1. Ryan

Leave a Reply