The 40th Anniversary of Indexing: A Pioneer Speaks Out

Monday, September 9, 2013 6,474 views

"Forty years later, index funds remain the best wealth management choice for all investors."

  -Rex Sinquefield1, Co-Founder of Dimensional Fund Advisors


 

At Index Fund Advisors, one of our heroes is Rex Sinquefield, the co-founder of Dimensional Fund Advisors with David Booth and the original co-author of the magisterial Stocks, Bonds, Bills, and Inflation with Roger Ibbotson. He was also one of the originators of index fund investing when he was an investment officer in the trust department of American National Bank Chicago. Along with John Bogle of Vanguard, Sinquefield endured the relentless questions of why anyone should settle for average as well as the taunt that index funds were inherently un-American. Thankfully, neither of them was deterred.

We found Sinquefield’s recent column1 in Forbes to be quite refreshing. He makes no apologies and pulls no punches as he sets forth the raison d’etre of indexing: “Indexing stocks and bonds, or passive investing, is based on the principle that the market doesn’t misvalue securities. At any moment in time, the market sets its own prices and those prices are right for that time.” Sinquefield dismisses the occasional successes of active management as “random and not predictive of future success”. In addition Sinquefield reminded us of Nobel Laureate Merton Miller's description of how free markets work from an interview with Peter Tanous back in 1997. Miller said, “Everybody has some information. The function of the markets is to aggregate that information, evaluate it and get it incorporated into prices.”

The success of indexing over the last forty years has been nothing short of remarkable. Although it started as a purely academic idea, indexed assets now comprise approximately 25% of all investment company assets, including exchange-traded funds2. IFA has documented the long-term decline of active management in articles such as this one.

Sinquefield issues a challenge to his readers when he asserts, “If you believe in stock picking on your own or through an active manager, you’re saying that an individual can make valuation judgments that are superior to the market.” This reminds us of one of our all-time favorite Sinquefield quotes from 1995:

 “So who still believes markets don’t work? Apparently it is only the North Koreans, the Cubans and the active managers.”

We sincerely hope that Sinquefield will continue to speak out on investment-related topics.


1http://www.forbes.com/sites/rexsinquefield/2013/09/05/40-years-later-index-funds-remain-the-best-wealth-management-choice-for-all-investors/

2http://www.icifactbook.org/index.html (The 25% was derived as 17% of mutual fund assets plus the $1.3 trillion of ETF assets, almost all of which are indexed)

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