Lewisburg, PA – Recently I was reading an article from John Bogle founder of Vanguard. John is well known in financial circles as one of the champions of passive investing using index funds. John came from a strong academic background; as such passive index investing makes total sense. He was one of many noted academic types along with Eugene E. Fama, H. Markowitz, M. Miller, W. Sharpe to mention a few, back in the 70s that started touting passive vs active investing.
Today some 45 years later and with many studies from Nobel Laureates, Economists, and Professors at most institutions of higher learning, the data is very clear. Returns come from the market not from managers. Passive investing is superior, especially when active management trading costs are factored in.
Remember, active or passive, they are all in the same market environment. However, many new developments in science are unknown to most casual investors. It would be naïve to think that technology and science has not improved investing in the last 50 years, when it has improved every other aspect of life.
The majority of Americans are unaware of other ways of pursing a passive approach to investing. The most notable would be referred to by the academics as “structured index” investing. Traditional index funds follow commercial benchmarks, thus reducing flexibility, and as a result an index fund accepts lower returns and increased trading cost in favor of tracking.
Structured funds replicate the index in a mechanical fashion and apply risk premium filters that have been empirically proven to capture actual, broad-based, global market returns. These academics have defined where returns come from in the stock market. As well, they have defined risk premiums and the historical returns of those premiums (The Three Factor Model). There are four primary risk premiums:
• Market returns over fixed returns
• Size of companies, small versus large
• Value companies, value versus growth
• Profit (the latest empirically proved risk premium)
These have all been defined and quantified with historical data from 1927 to present. The application of this data has created filters that have been empirically proven. The result takes an indexing platform to another level by understanding which filters ensure market returns are accomplished with the least amount of cost.
We believe that education leads to clarity, clarity to confidence, and only with confidence can one find peace of mind over their investing life. Today’s global economy requires that consumers and investors be more educated, but there’s a plethora of opinion often creating information overload. Have you ever considered getting some coaching about the academic truths of investing? To learn more, visit some of the videos on our website.