Index funds: the whole argument in one page
Why the boring option beats most of the clever ones, over any period long enough to matter...
An index fund buys a small piece of every company in a market and holds it. That is the entire product. Here is why it is enough.
The arithmetic
Every pound invested in a market is owned by someone. Before costs, the average investor earns the market's return, because together they are the market. After costs, the average investor earns the market's return minus what they paid. The fund that charges the least therefore beats the average, every year, by construction.
The evidence
- Over fifteen years, about nine in ten actively managed funds trail the index they set out to beat.
- The one in ten that beat it is not the same one in ten from the previous fifteen years.
- The fee difference compounds. One percent a year over thirty years is about a quarter of the final sum.
What it does not do
It does not avoid crashes. An index fund falls exactly as far as the market falls, and the market falls hard about once a decade. The argument is not that you will not lose money. It is that you will lose less than you would have with most of the alternatives, and recover with the market rather than hoping a manager does.
What to actually buy
One global fund, the cheapest your platform offers, bought every month regardless of the news. The next post in this series is about the fees that are not on the label.
Anita Desai
Twelve years in pensions administration, now writing Atlas full time. Believes every money question has a worked example, and that most advice skips it.
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