Index investing represents the idea of having a portfolio mimic the performance of a well-known index such as the S&P 500 index or the Wilshire 5000 Index.
The theory behind this is that an index represents the average growth of the set it represents (eg S&P represents “America” and the Dow Jones Transports represent shipping and transport companies). And by investing this way, we would participate in the average long term growth of an economy.
Studies have also shown that actively-managed funds typically don’t beat market indices so people are better off investing in the index. Why is that? Sometimes, active managers become closet indexers. They are so afraid of performing poorly compared to the index (and risking losing their jobs) that they invest in index companies and perform close enough to the index not to get fired.
Other reasons include the impact of management fees and the skill deficiency of managers. Nonetheless, it also depends on the risk profile. If one is not interested in massive stock market fluctuations, then the risk level can be toned down but likely long term performance will trail the index. There are some money managers who do outperform long term with less risk though.
The big debate is indexing vs active management and the argument continues. what is your opinion on this?