Index Investing: A Brief History and Why It Beats Mutual Funds and Investment Advisors
When it comes to investing, there are a lot of options out there, from mutual funds to investment advisors. But one approach has been gaining popularity in recent years: index investing. In this article, we’ll take a closer look at index investing, its history, and why it’s likely to provide better results than mutual funds and investment advisors.
What is Index Investing?
Index investing is a passive investment strategy that seeks to replicate the performance of a broad market index, such as the S&P 500 or the TSX Composite Index. Instead of trying to beat the market, index investors aim to match its returns. Index investing can be achieved through ETFs or index mutual funds.
History of Index Investing
The idea of index investing was first introduced by John C. Bogle, the founder of Vanguard, in the 1970s. He believed that most active managers couldn’t beat the market consistently and that passive investing would provide better returns over time. Bogle created the first index fund, the Vanguard 500 Index Fund, in 1976. The fund aimed to replicate the performance of the S&P 500 and provided investors with a low-cost, diversified investment option.
Why Index Investing is Better
Over the years, index investing has proven to be a successful investment strategy. According to a report by S&P Dow Jones Indices, over a 15-year period, 92.2% of Canadian equity funds underperformed their benchmark. This means that actively managed mutual funds are not likely to provide better returns than index funds. In contrast, index funds provide low-cost, diversified exposure to the market, making them a reliable investment option for the long term.
Investment advisors, on the other hand, may have a conflict of interest. They may recommend investments that benefit them rather than their clients, and they likely charge high fees that eat into investment returns. A study by Morningstar found that only 23% of Canadian equity funds with a high fee managed to outperform their benchmark, compared to 49% of funds with low fees.
Final Thoughts
Index investing may not be as exciting as trying to beat the market, but it has a proven track record of success. By replicating the performance of the market, index investors can avoid the fees and potential conflicts of interest that come with active management. If you’re looking for a reliable investment option, consider index investing.
One easy way to implement an index investing strategy is to go with a Robo-Advisor portfolio. The main, and perhaps only, drawback are the associated fees, which are significantly lower than mutual funds but can still reduce long term investments by 6 or even 7 figures. To learn how to eliminate those fees, keep reading:
