Watch my talk on index investing: Can we get higher returns with lower risk?

Last Updated on December 28, 2021 at 6:46 pm

Last week I gave a talk on index investing and market timing at the monthly meeting of the Tamil Nadu Investors Association. This is a private recording of the index investing part. We have already started the discussion on the marketing timing part with: Do we need to time the market? More on this will follow next week.

This talk on Index investing is a compilation of results published earlier. Before you head to the video, a few considerations:

1: The goal of a fund manager is to beat the benchmark the fund house has chosen (not the benchmark we choose to compare performance). So choosing a different benchmark and expecting the fund to beat it is unfair

2: It is an irrefutable fact that fund houses have managed to beat their chosen benchmarks both on an absolute (higher return) and risk-adjusted basis (higher return for a given level of risk). It is also an irrefutable fact that active mutual funds have managed to lower volatility compared to index funds. To discard this as unnecessary is both premature and immature.

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3: Whether the above trend will continue or not is anybody’s guess. To assume that it will not is like implicitly believing that we can predict market movements.

4: Markets are neither “efficient” nor “mean reverting” and is not the reason why indexing will do better. Read more:

The 80/20 rule: Making sense of richest 1% Indians owning 58% wealth!

Fat Tails: The True Nature of Stock Market Returns: Part 1

Fractals: The True Nature of Stock Market Returns: Part 2

5: Expecting fund managers to beat indices on returns alone, forgetting risk is immature.

6: Worrying about mutual fund expenses and assuming using a cheaper index fund will be better requires additional qualifications on the part of the investor as discussed in the video.

7: Index fund or active fund, systematic risk management is essential Active mutual funds offer an additional layer of risk management. It is okay to discard that as unnecessary, but the investor has to make up for it. Can you?

8: Active mutual funds come with unquantifiable risks: human management. The primary reason for indexing is to state: I don’t dont want this human element in my portfolio. I will invest as per a fixed set of rules associated with the index construction.

Now, I don’t care whether you use index funds or prefer active funds. All I am saying is choose either way after evaluating all sides impartially. Do not start indexing because WB said so or Bogle said so. Evaluate facts. If you cannot or if you won’t, admit that you have taken a leap of faith.