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The writer is the author of A random walk in Wall Street
The results are in: this time is not different. Indexing remains the optimal investment strategy.
Each year, S&P Global Ratings publishes reports comparing all investment funds actively managed with various stock market indices. These reports are considered to be the Order to assess the performance of the management of active funds with their alternatives of index funds.
Most of the end of 2024 report This month is that there was no surprise. The American passive index funds in 2024 surpassed approximately two -thirds of the funds actively managed. This is consistent with the past results which also show that a third of managers who surpass in a single year are generally not the same as those who win the comparison in the next.
When you aggravate the results over 20 years, around 90% of active funds produce lower yields in low -cost index funds and indexed stock market funds. Long -term equivalent results have been recorded for developed economies, emerging markets and bonds. Even for small capitalization funds, which had a good 2024, only 11% have surpassed in the past two decades.
It is not impossible to beat the market, but if you try, you are more likely to reach the yields of the lowest 90% of active managers. The evidence becomes stronger each year: the investment of index funds is an optimal strategy for the ordinary investor.
Despite the evidence, many active managers argue that the future will be different. A common opinion is that the popularity of passive investment has created an unhealthy concentration of actions in popular indices and has made indexing an increasingly risky strategy. A second argument defended by certain active managers is that index investors pay money on the market in regard to the benefits of the company and growth opportunities. This compromises the market capacity to reflect fundamental information, creates poor pricing and thus allows active managers to use their skills to surpass in the future.
It is certainly correct that the market is very concentrated. Some technological actions (known as Magnifiment 7) had a third of the third party in the S&P 500 index and were responsible in 2024 for more than half of the total yield of 25% of the market. But such a concentration is not unusual.
In the early 1800s, banking actions represented approximately three -quarters of the total stock market value. The rail actions constituted a large part of the total market value in the early 1900s, and the actions linked to the Internet dominated the index in the late 1900s. And it is far from unusual that a small percentage of stocks is responsible for most of the market gains. A study By Hendrick Bereseinder noted that only 4% of US stocks listed on the stock market have represented almost all of the excess yields of the US stock market on cash bills since 1926. A concentrated market is not a reason to abandon the index funds. The possession of all the actions on the market will guarantee that you have the few actions responsible for most of the market gains.
A second argument “this time is different” against indexing is that index funds have increased so quickly that it interfered with market capacity to assess the actions even almost correctly and to reflect new information with precision. Some have suggested that the growth in passive indexing has generated stock market bubbles such as the current boom in AI actions. No more investment without regard to basic information will more easily allow active managers to beat the index in the future.
There are logical and empirical reasons to reject these claims. Even if 99% of investors bought index funds, the remaining 1% would be more than sufficient to ensure that the new information has been reflected in equity prices.
And if we think that the bubbles will allow active managers to surpass, consider the data of the boom of Internet actions which have developed until 2000. Many actions linked to the Internet sold to multiple three -digit profits, much higher than the current evaluations of today’s favorite AI actions. Spiva data shows that in 2001, 2002 and 2003, 65, 68 and 75% of active managers underwent the market during each of these “post-bubble” years.
The evidence becomes more convincing over time. The heart of each investment portfolio must be indexed and diversified between asset classes. Indexing will certainly result in low costs and low transaction costs, and it is effective taxation. Indicate funds are also boring, and this can be one of their greatest advantages, less vulnerable to the waves of optimism or pessimism that characterize financial new. Like the white rabbit in the film Alice in Wonderland advises us: “Don’t do something, stay there.”
