Sign In
SHARE
Why Index Investing Isn't Passive Investing
In the debate over active vs passive investing, the base-case assumption is that a passive investment involves tracking a stock-market index, normally the S&P 500. But of course stock-market indices are actively managed, with listing requirements and changing components and survivorship bias and that kind of thing. And according to a fascinating paper by Angelo Ranaldo and Rainer Häberle, actively-managed indices significantly outperform a genuinely passive buy-and-hold strategy.
More precisely, actively-managed indices outperform a passive buy-and-hold approach in up markets, and they underperform in down markets. But since the whole point of investing in stocks is that they tend to go up over long periods of time, one can conclude that there is a real outperformance here over the long term.
I'm not sure how the efficient markets hypothesis deals with this: as you can see from the table above, the degree of outperformance is large. And I don't think it's a self-fulfilling phenomenon, either, where the very fact of being included in an index causes a stock to outperform: the same phenomenon is seen in relatively unpopular indices which aren't benchmarked.
But this is yet another reason to buy index funds rather than individual stocks. If you buy and hold your stocks like any good long-term investor should, you have to outperform substantially just to keep up with the index, let alone beat it.
Loading...
Thank you for registering as a Portfolio.com Insider. Your comment has been added.
Create Your Public Profile
- The Times' Rorshach Geithner Story
- Apr 27 2009 9:26AM EDT
- Sinking Animal Spirits
- Apr 27 2009 8:45AM EDT
- Counter-cyclical Urban Policy
- Apr 26 2009 10:00AM EDT
- Be Your Own Counterfeiter
- Apr 26 2009 9:36AM EDT
- Being Tim Geithner
- Apr 25 2009 12:37PM EDT
- Notes From a Press Conference Naif
- Apr 25 2009 9:41AM EDT
- What Good is the News?
- Apr 25 2009 8:32AM EDT
- Stressful Enough
- Apr 24 2009 2:29PM EDT
- Not Regretting the Pound
- Apr 24 2009 1:09PM EDT
- Introducing the New Ford Squeeze
- Apr 24 2009 9:47AM EDT
- Non-Economic Questions of the Day
- Apr 24 2009 9:12AM EDT
- The Stress Test Blind Alley
- Apr 24 2009 8:36AM EDT
- Happy Hour
- Apr 23 2009 9:40PM EDT
- Recovery Without Rebalancing
- Apr 23 2009 6:13PM EDT
- The Shape of Your Recession
- Apr 23 2009 5:11PM EDT
Archive
Categories
Links
- Email Ryan Avent
- Econospeak
- Financial Crookery
- The Epicurean Dealmaker
- Naked Capitalism
- Alphaville
- Marginal Revolution
- The Panelist
- FP Passport
- Overcoming Bias
- Andrew Leonard
- Barry Ritholtz
- Brad Setser
- Carbon Tax Center
- Calculated Risk
- Greg Mankiw
- Free Exchange
- Dean Baker
- Alexander Campbell
- Kash Mansori
- The Bayesian Heresy
- A Fistful of Euros
- John Quiggin
- Michael Mandel
- Lance Knobel
- Mark Thoma
- Dan Gross
- Curbed
- Streetsblog
- Chris Anderson
- Deal Journal
- MarketBeat
- DealBook
- DealBreaker
- Carl Bialik
- Michelle Leder
- Brad DeLong
- Ultimi Barbarorum
