The Case for Index Funds

A new study by professors at the University of Chicago and Dartmouth reinforces the wisdom of the small print in mutual fund advertisements: “Past performance does not guarantee future results.”  The research found that “virtually all actively managed funds” fail to outperform the indexes against which they are compared, and that any success achieved by actively managed mutual funds is “almost always due to luck, not the stock-picking skill of fund managers.”  As reported on, the findings indicate that “only a very small percentage of fund managers have more than enough skill to cover their costs.”

4 Responses to The Case for Index Funds

  1. Matt Bell June 24, 2010 at 10:28 PM #

    Well said, Brian. For the DIY investor, index funds usually make the most sense. But for those who prefer to work with an advisor, I regularly recommend looking for one via and

  2. Brian Cannon June 24, 2010 at 2:50 PM #

    The “boring”, age old wisdom never makes for great stories at cocktail parties, but I would rather follow the basics and be on a healthy financial path.

    1) Build an emergency fund.
    2) Payoff debts.
    3) Diversify investments.

    As a financial advisor who puts clients in portfolios of mutual funds, I can tell you from experience that index funds are a good choice, but we do regularly see funds and fund managers show periods of signifcant outperformance compared to benchmarks. This happens by a fund manager putting a specific spin on their investment choices. For instance in 2009, our firm developed aggressive strategies to ideally benefit from what was perceived as opportunities in the market by increasing exposure to real estate, international, emerging markets, and corporate bonds. I just reviewed a specific clients’ results who earned 35% in 2009 after all fees compared to 23.5% that the S&P 500 earned. We have seen a lot of cases like this in both up and down markets. For most investors, a passive approach with index funds will work best, but there are other investors out there who may be able to earn more by being willing to take an active approach.

  3. Matt Bell June 23, 2010 at 9:42 PM #

    Amen to that, Andrew. I’ve long believed that the boring route toward building wealth usually works best.

  4. Andrew Jacobson June 23, 2010 at 8:40 PM #

    Matt, this is right up my alley. I have been boring my friends with my thoughts on index funds for a long time. It isn’t the sexiest option, but I would rather tie myself to the benchmark than pay higher fees and try to guess which manager will get lucky and beat the benchmark this year.

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