Don't Buy Index Funds

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EB Investor


  • Investors are increasingly choosing to invest "passively" I will present 10 reasons why this is a mistake.
  • Indexers ignore the vast amount of academic research that proves the best way to invest is through the science of investing.
  • Investors are putting far too much faith in the index universe, and will once again get burned.
  • Instead they should be following the science of investing, and investing with DFA.

When an investor is looking to put together an investment portfolio the popular advice these days is for them to buy a total stock market index, total international stock index and total bond market index and call it a day. In my view this is the worst thing that an investor can do. Below I will present ten reasons why I believe investors should never buy standard index funds and instead should be active investors following the science of investing.

There's no such thing as passive investing. It's true. Passive investing in its purest form doesn't exist. Only lesser degrees of active management exist. (Index funds) must be continuously maintained by real people who face difficult issues when trying to track an index. The managers must make hundreds of active decisions each day concerning when to trade, what to trade, what to do with new cash, how to raise cash when needed, whether to use futures, swaps or other derivatives, etc. There's nothing passive about managing an index fund.
- Rick Ferri, CFA

1. Index funds are NOT passive

There is nothing passive about index funds. Index funds are constantly making decisions about what to put in and out of an index fund. This makes comparisons of the S&P 500 index with other investment vehicles nearly impossible. The S&P 500 in 1976 is not the same S&P 500 of today. Passive investing is a delusion, and a simplistic way of marketing to investors that they are better off leaving their investments alone. While I would agree that behavioral mistakes of investors trying to get in and out of an investment will likely have negative consequences on their long term wealth creation. The notion that the best way to be "passive" is to buy index funds is simply untrue. There is nothing passive about index funds.

This article was written by

EB Investor profile picture
Chief Investment Officer, Private Family Office--Providing Evidence-Based Investment Research for those building, managing, and preserving wealth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes only and is not an offer to buy or sell any security. It is not intended to be financial advice, and it is not financial advice. Before acting on any information contained herein, be sure to consult your own financial advisor. I have used DFA Funds in client accounts.

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