Are index funds the best investment strategy for most investors? In this episode of Rational Reminder, Benjamin Felix, Dan Bortolotti, and Mark McGrath explore why low-cost index funds should be the primary investment strategy for most people. They explain how index funds evolved from a niche concept to a widely accepted strategy and outline their six key benefits. Learn about the fees associated with index funds, why index funds outperform most actively managed funds, and how to avoid the risks of picking individual stocks. They also explore academic research on long-term mutual fund performance, the persistence (or lack thereof) in active management, and the dangers of alternative indexing schemes. Discover how behaviour impacts investment decisions and why a globally diversified portfolio is crucial. Finally, in the aftershow, Ben shares an update regarding his health and listener feedback from the Rational Reminder community. Join the conversation and uncover why index funds are the best investment strategy and how to leverage them effectively to maximize your portfolio for long-term gains. Tune in now!
Key Points From This Episode:
(0:01:58) Outline of today’s topic and why index funds should be everyone’s main investment strategy.
(0:05:10) Index fund fundamentals, market cap weighting, and why not all ETFs are index funds.
(0:10:03) Learn about the transition of index funds into mainstream finance and their low-fee advantages.
(0:13:30) Linking fees to index performance and why lower fees gives them an advantage over managed funds.
(0:19:50) The general awareness about index funds and what impact the lack of diversification has on actively managed funds.
(0:26:35) Explore critical research comparing the returns on investment between index funds and actively managed funds.
(0:33:32) Unpack why the size of the active management industry matters and common misconceptions surrounding the long-term returns of mutual funds.
(0:42:26) Discover why some fund managers do well and how sector-specific performance influences stock returns.
(0:48:28) Unpack why average returns are better than beating the market and what makes index funds tax efficient.
(0:51:08) Find out what makes index funds easy to use and how this results in higher returns in the long term.
(0:55:25) How index funds are consistent with foundational finance theory and why thematic ETFs and sector-specific index funds should be avoided.
(1:05:40) The aftershow: Ben shares a personal health update, Rational Reminder news, and a request for listener AMA questions.
https://community.rationalreminder.ca/t/episode-347-the-case-for-index-funds-dicussion-thread/35435
‘The Arithmetic of Active Management’ — https://www.tandfonline.com/doi/pdf/10.2469/faj.v47.n1.7
‘Sharpening Sharpe’s Arithmetic’ — https://www.tandfonline.com/doi/full/10.2469/faj.v74.n1.4
‘Mutual Fund Flows and Performance in Rational Markets’ — https://www.journals.uchicago.edu/doi/abs/10.1086/424739
‘Why Indexing Works’ — https://onlinelibrary.wiley.com/doi/abs/10.1002/asmb.2271
‘Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks’ — https://www.tandfonline.com/doi/abs/10.1080/0015198X.2023.2188870
‘The Performance of Mutual Funds in the Period 1945-1964’ — https://www.jstor.org/stable/2325404
‘On Persistence in Mutual Fund Performance’ — https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
‘Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk’ — https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1964.tb02865.x
‘Passive in name only: Delegated management and index investing’ — https://heinonline.org/HOL/LandingPage?handle=hein.journals/yjor36&div=20&id=&page=
Links From Today’s Episode:
Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemind
Rational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/
Mark McGrath on X — https://x.com/MarkMcGrathCFP
Professor Hendrik Bessembinder — https://search.asu.edu/profile/2717225
Arizona State University — https://www.asu.edu/
KRIS — https://www.kris-online.com/
Professor Hendrik Bessembinder papers on SSRN — https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=667
SPIVA — https://www.spglobal.com/spdji/en/research-insights/spiva/
Episode 322: Professor Marco Sammon — https://rationalreminder.ca/podcast/322
Episode 124: Professor Lubos Pastor — https://rationalreminder.ca/podcast/124
