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The writer is the author of A random walk across Wall Street
The results are in: This time is not different. Indexing remains the optimal investment strategy.
Yeardo S&P Global Ratings publishes reports that compare all investment funds actively managed with different stock indices. These reports are considered the golden standard for evaluating the Active Management of the Fund with their index fund alternatives.
After all, from 2024 report of 2024 is that there were no surprises. US Passive Index funds in 2024 exceeded about two -thirds of actively managed funds. This is in accordance with past results that also indicate that one -third of managers that exceed each year are not generally the same as those who earn the comparison in the other.
When complicating results over 20 years, about 90 percent of active funds produce inferior returns in low -cost index funds and marketed indexed funds. Long -term equivalent results were recorded for funds concentrated in developed economies, developing markets and bonds. Even for funds with small hats, which had a good 2024, only 11 percent exceeded the last two decades.
It is not impossible to overcome the market, but if you try, you are more likely to reach 90 percent of active managers. The tests become stronger every year: Investing the index fund is an optimal strategy for the usual investor.
Despite the evidence, many active managers argue that the future will be different. A common view is that the popularity of passive investment has created an unhealthy concentration of shares in popular indices and has made an increasingly dangerous strategy. A second argument protected by some active managers is that index investors pour money into the market regardless of company revenues and growth opportunities. This compromises market ability to reflect basic information, creates wrongdoing and thus allows active managers to use their skills to overcome in the future.
Of course it is accurate that the market is very focused. Some technology shares (known as The Magnificent 7) had a third weight in the S&P 500 index and were responsible in 2024 for more than half of the total return of 25 percent of the market. But such concentration is not uncommon.
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In the early 1800s, bank shares represented about three -quarters of the total share market value. Railway shares constituted most of the total market value in the early 1900s, and internet -related shares dominated the index in the late 1900s. And it is far from the unusual that a small percentage of shares were responsible for most market profits. A Bessembinder’s Hendrick Bessembinder found that only 4 percent of publicly traded US shares have calculated almost all excessive US market returns on Treasury bills since 1926. A concentrated market is not a reason to abandon index funds. Possessing all market shares will ensure that you own some shares responsible for most market profits.
A second argument “This time is different” against indexing is that index funds have increased as fast as it has interfered with market ability to appreciate the shares even almost correctly and accurately reflect new information. Some have suggested that the increase in passive indexing has generated stock market bubbles such as the current boom in the shares associated with it. More investment, regardless of basic information, will enable active managers to beat the index in the future.
There are logical and empirical reasons to refute such claims. Even if 99 percent of investors bought index funds, the remaining 1 percent would be enough to ensure that new information is reflected in the stock prices.
And if anyone believes that bubbles will enable active managers to overcome, consider the online stock data that expanded by 2000. Many internet -related shares sold in multiple profits, much higher than current shares of today’s favorite shares. SPIVA data show that during 2001, 2002 and 2003, 65, 68 and 75 percent of active managers underestimated the market in each of these “after the bubble” years.
The evidence grows more convincing over time. The essence of any investment portfolio must be indexed and diversified throughout the assets classes. Indexation will probably result in low tariffs and low transaction costs, and is effective tax. Index funds are also boring, and this can be one of their biggest advantages, less vulnerable to waves of optimism or pessimism that characterize financial news. As the white rabbit in the film Alice in Wonderland It advises us, “don’t just do something. Stay there.”
