“Despite the theory and publicized long-term success of indexed investment strategies, criticisms and misconceptions remain.” – Vanguard
Because low cost, indexed investing is considered so simple, many investors don’t realize that Vanguard regularly puts out terrific research pieces. Their latest, Debunking some myths and misconceptions about indexing, continues this trend.
The authors of the white paper go through the following five myths and back everything up with hard data as to why they don’t stand up to further inspection:
Myth #1. Indexing only works in ‘efficient’ markets.
Myth #2. Who wants to be ‘average’?
Myth #3. You get what you pay for – Higher cost + Higher ratings = Higher returns.
Myth #4. Market-cap weighting overweighs the overvalued.
Myth #5. Index funds underperform in bear markets.
I love this type of myth-busting data because far too many investors tend to follow rules of thumb based opinions and not the facts.
I’ve been looking at similar information and graphs for a number of years now that are just like the following one from this report, but this type of information never ceases to amaze me:
So 70-80% of index funds have outperformed their active fund counterparts in pretty much every single category and asset class over the past 10 years.
The consistency of these index fund ouperformance numbers over the years is one of the most impressive long-term track records in the business.
A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. I manage portfolios for institutions and individuals at Ritholtz Wealth Management LLC. More about me here. For disclosure information please see here.
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