April 27, 2016

The Rise of the Most Powerful Idea in Investing

The biggest story in the finance industry during the past decade might not be the 2008 crisis, or new regulation, or even record-low interest rates. Maybe it's the shift from active to passive-investment management. In the realm of mutual funds, the change is stunning.

Why is this happening? One reason is technology, which makes it much easier to trade large numbers of different assets at the same time, and to construct baskets of assets that track indexes closely. Another factor might be low interest rates and declining returns, which make asset-management fees more salient and painful, pushing people toward low-fee passive-investment vehicles.

Financial markets do a decent, if not always perfect, job of scooping up available information about the value of stocks and other assets, and incorporating this information into the price. People who try to beat the market are likely to lose, since they tend to be trading on stale information, while paying fees at the same time.

Instead, why not just sit back, skip most of the fees and earn the market average return, sometimes known as beta? You’ll be doing better than more than half the money out there in the market, and saving effort besides.

Read more at http://www.bloombergview.com/articles/2016-04-21/the-rise-of-the-most-powerful-idea-in-investing

My note: In India, you can easily do by simply investing a fixed sum in NIFTY BEES every month. I wrote a post on this 3-4 years ago.

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