Index Tracking is your only (Wo)Man
“There are three classes of people who do not believe the markets work: the Cubans, the North Koreans, and Active Managers.” Rex Sinquefield
I came across this quote while reading ‘The Elements of Investing’ by Malkiel & Ellis. The book is concise, to the point, and a good read for anyone who is considering investing in any asset class via pension or other long-term savings accounts. But, do bear in mind that it is directed at the US market and there are some anomalies in terms of the products and funds that they refer to.
The Irish Funds market is dominated by offerings from ‘Active’ Fund Managers. The underlying premise of these; is that the Fund Manager will somehow outperform the market by actively managing your investment. He/She will try to do this by applying his/her skills in selecting stocks, bonds etc that will beat the market.
Passive Funds (Index-Tracking), on the other hand, simply ‘track’ the performance of a basket of assets. For example, the passive fund that tracks the 500 largest Company shares in the US is the S&P 500 Index. Put another way, there is no ‘human’ involvement in asset selection so there is less of a chance of ‘someone’ messing it up.
In my humble opinion, the average investor is better off with Index-Tracking Funds: as opposed to trying to pick stocks or active fund managers that will outperform the market. The fund managers past performance should be ignored, as it has no bearing on what may happen in the future. It doesn’t seem to matter how many times you tell this to people, they still want to consider it in the decision making process. It’s folly, pure and simple.
It is my firm belief that low-cost, well diversified [by asset class and region], index-tracking funds are the most suitable investment vehicle for folks who do not consider themselves expert stock pickers. As the above authors say: “Nobody knows more than the market”.
If you want to tease this out a bit more or have an opinion on this type of investment strategy, please share your comments below.