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Why Indexing Has Won, How to Fix Financial News, and a Summer Book Recommendation

Morgan Housel
June 27, 2013

Tadas Viskanta runs the finance blog Abnormal Returns. It's one of the most useful and thought-provoking reads out there, offering a mix of links from other financial writers and wisdom from Tadas himself. 

Tadas hosted a writer roundtable last week while he was away. He was nice enough to include me. Here's how I answered his questions. 

Q: This post argues that John Bogle has already won. Has he? What comes next?

He's clearly won.

Josh Brown once quipped that the definition of a hedge fund is "a vehicle that turns investor capital into Greenwich real estate." That's as relevant to mutual funds as it is hedge funds. The evidence is overwhelming that the vast majority of active managers can't beat an index, which is actually a certainty given the size of the industry. Their justification of fees is now that they offer risk management and lower volatility, but that's questionable, too -- and no one asked investors if they signed up for such an arrangement.

Active managers can hide during a 1990s boom when their fund earns 30% while the S&P 500 (INDEX: ^GSPC) returns 32%. No one cares about underperformance when they're still getting rich. But when investors realize they paid a manager 150 basis points a year for a lost decade, they wake up.

Individual investors have gotten the message. The next to move will be company 401(k) administrators. My guess is that 10 years from now, there will be a third fewer actively managed equity funds, 2-and-20 will become 1-and-5, Vanguard will gain another $1 trillion in assets above market returns, and most investors will be better off because of it.

Q: I argue in this post that a mandatory savings program would be net-net beneficial to society. Agree, disagree?

I agree. It's clear that most Americans don't save enough, and that their lack of savings stems from abysmal financial literacy and not knowing how to save. At the same time, I'm sympathetic to the view that we shouldn't force everyone to save a certain amount, especially if they have limited control over how it's invested. I'd like to replace the optional, opt-in 401(k) system with a mandatory savings program with some sort of opt-out function.