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The first step on the index funds journey is to recognize active investor
behavior. If all investors were lined up in a row, could the active investors
be identified? Active investors actively engage in stock picking, time
picking (market timing), manager picking, and style picking. They usually
share the following thoughts and behaviors:
• Own or plan
to own actively managed mutual funds.
• Select stocks
they think can outperform a market. We call this stock picking.
• Think there
are times to be in a market and times to be out of a market. We call
this time picking, generally known as market timing.
• Think that
active managers with the best track records are the ones to select to
manage their investments. We call this manager picking.
• Shift in
and out of styles or indexes in an effort to chase returns, e.g., from
large cap to small value. We call this style picking.
• Are primarily
invested in the S&P 500, thinking this provides adequate diversification.
If you show those
signs,
you are engaging in active investing and can benefit greatly from this
12-Step Program.
If not, you are well on your way towards understanding the benefits of a
diversified portfolio of index funds, which is the basis of Index Funds
Investing.
Keep
reading, you will soon understand the wisdom of index funds, how much
wealth you may have lost in the past, and how much you can accumulate
if you learn how to change the way you invest. Let's start!
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"
Properly measured, the average actively managed dollar must
underperform the average passively managed dollar, net of
costs. Empirical analyses that appear to refute this principle
are guilty of improper measurement." |
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William F. Sharpe, Nobel Laureate in Economics, 1990, The
Arithmetic of Active Management, The Financial Analysts'
Journal Vol. 47, No. 1, January/February 1991. pp. 7-9. |
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"
Most investors are pretty smart. Yet most investors also remain
heavily invested in actively managed stock funds. This is
puzzling. The temptation, of course, is to dismiss these folks
as ignorant fools. But I suspect these folks know the odds
are stacked against them, and yet they are more than happy
to take their chances." |
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Jonathan
Clements; The Wall Street Journal, February 27, 20 01 |
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The deeper one delves, the worse things look for actively
managed funds." |
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