IndexingWe are con­stantly bom­barded with stock mar­ket news: the Dow is up, the NASDAQ down. Is there some­thing we should do about these mar­ket gyra­tions? Wall Street moguls claim they under­stand mar­ket swings and should man­age our money. But knowl­edge­able investors have increas­ingly accepted the aca­d­e­mic con­sen­sus that the prob­a­bil­ity of beat­ing the mar­ket is slim at best, and that a port­fo­lio based on low cost index funds will most often out­per­form the pros. In fact, numer­ous titans of invest­ing such as War­ren Buf­fett, Peter Lynch, and David Swensen advise index­ing for most investors, indi­vid­u­als and insti­tu­tions alike.

This sim­ple strat­egy over time beats nearly every­one– an esti­mated 99 per­cent of investors! Why can’t even the best and smartest pro­fes­sional investors beat and index– a sim­ple, mind­less, mechan­i­cal for­mula? The main rea­son is that there are so many smart, well informed and hard work­ing investors chas­ing this same dream (which is the essence of the ‘effi­cient mar­ket hypoth­e­sis’). Yet another rea­son is that peo­ple are human, and ill-equipped for this par­tic­u­lar task. They are emo­tional, ener­getic and opin­ion­ated, and they can focus only on a lim­ited num­ber of things at one time. All of these char­ac­ter­is­tics lead to mis­takes that dimin­ish performance.

If index­ing is so amaz­ing, why doesn’t every­one index? Peo­ple can’t leave “out­stand­ing” alone. Nobody wants to beat merely 99 per­cent of other investors. They want to beat them all. In the process, despite their ini­tial hopes, they end up inflict­ing sig­nif­i­cant finan­cial dam­age on them­selves, often com­bined with an emo­tional toll as well.