You may think of investment people as nerds (and you are mostly right), but we have areas where we are passionate, too. One of them is whether index investing or active management is better.
On the Index side, you have people who sometimes refer to themselves as Bogleheads (kind of like Parrotheads, but WAY less fun) after the founder of Vanguard, John Bogle. These people believe that no active manager can ever consistently beat its benchmark index over a long period of time. Therefore, say the Bogleheads, you should just by inexpensive index funds and get the market return.
People who are fans of active management (sorry, no catchy nickname here) believe that there is value in having people scrutinize companies before putting your money into them. Why invest in an Enron just because it’s part of some list if you can see that they are cooking the books and headed for disaster? Also, people hope that active managers will help cushion the blow by changing up their investments in the face of overall market downturns.
What do I believe? As usual, I take a middle ground. In very efficient markets, like the US Large Cap stock market, it seems to be really hard for a manager to beat the S&P 500 index over time. This seems like a good place to use index funds.
However, in markets where the companies are less well known, say the international small cap market, I’d like someone looking into those investments and not just investing in a list of 5,000 small foreign companies and hoping for the best.
This is a short explanation of something that investment folk rage over, but I think it gets you the basic idea. Now, at your next nerdy dinner party, you can contribute to, or at least understand when people take up arms on this touchy subject.
Next time, what’s the difference between ETFs and Index Mutual Funds?
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