Index invest­ing has evolved grad­u­ally over the last half cen­tury. Only recently has it matured to the point where tril­lions of dol­lars are indexed. Prior to that, invest­ing meant select­ing indi­vid­ual securities.

Begin­ning in the 1950s with Harry Markowitz, aca­d­e­mics and prac­ti­tion­ers started to out­line a dif­fer­ent approach. In the 1960s, William Sharpe, the Nobel Prize win­ner with Markowitz in 1990, devel­oped the Cap­i­tal Asset Pric­ing Model, and Eugene Fama devel­oped the Effi­cient Mar­ket The­ory (EMT). Later, Eugene Fama col­lab­o­rated with Ken French on the “Three-Factor” model.

EMT holds that stocks are more or less cor­rectly priced, since every­thing that is known about the stock is reflected in its price. Sure, prices change, some­times dra­mat­i­cally, based on new infor­ma­tion. But how are you going to find the new infor­ma­tion no one else has when mil­lions of investors are try­ing to beat you to it? The clear impli­ca­tion of the the­ory is that investors should buy large groups of stocks– i.e. index funds– rather than select­ing indi­vid­ual securities.

In the 1970’s, only insti­tu­tions were able to index. But in recent years, top advi­sors and well-informed folks have joined in.