Here is the final instalment in my three part series attempting to synthesise the active vs passive management.
The reasons for indexing that we considered in part one left us cold. They’re not convincing because they don’t apply in a lot of circumstances. In part two, we got a little warmer, focusing on the conflict between the activity of investing and investing as a business. In part three, we get red hot, focusing on the strongest reasons for indexing. They are:
You can’t control your behaviour. For example, you are impatient, you follow the herd or you don’t really know what you’re doing.
Indexing will help you to outperform 60-90 per cent of your competitors because they are almost certain to behave badly (even if you don’t).
Indexing makes fewer decisions and therefore fewer mistakes.
Cost matters more than ever in a low return environment.
The paradox of skill.
You get to spend more time thinking about the really important stuff, such as objectives, asset allocation and education.
Other Posts in This Series
- Introducing the MarketFox column on i3 Insights
- Part 1 – 9 commonly quoted and weak arguments in favour of indexing.
- Part 1 (bonus material) – 4 more popular and poor arguments in favour of indexing.
- Part 2 – 8 reasons why indexing might be a good idea. An alternative description might be 8 issues that active fund managers need to fix if they want to stay in business.
- Part 3 – The 6 most convincing reasons to index.
I want to give a big, big thank you to everyone that has phoned, tweeted, emailed and messaged to offer encouragement, ask a question or express a different opinion.
YOU are the reasons that I write. The web is an amazing place to meet interesting people and exchange ideas. I feel privileged and lucky to know that you’re reading. Let’s keep the conversation going!