Name: Reasons to Avoid Index Funds
Uploaded: 2023-05-08T19:50:02.000Z
Duration: 9 min 13 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

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of you watching these videos are already fully

on board with the idea that index investing makes sense.

and actively managed funds should be avoided

Most Canadians are apparently not on board with that idea.

of Canadian investment fund assets that is mutual fund

I'm Ben Felix Portfolio Manager at PWL Capital.

In this episode of "Common Sense Investing"

that there are no good reasons to avoid index funds.

Anecdotally, I can tell you that there are lots

of financial advisors out there who genuinely believe

that index funds are terrible investments.

And I'm willing to bet that it's this type of misinformation

from supposedly financial professionals that is

keeping so many Canadian dollars invested

Let's start with the classic fallback line for any advocate

that when you own the whole entire market, you will get all

of the ups and all of the downs that the market delivers.

The alternative would of course be investing

with an active manager that is able to feel out

and intuition to protect you from a downturn.

The active management story sounds way better

than writing out, down markets with index funds.

to look at the performance of active managers

in bull markets when stocks are doing well,

and in bear markets, when stocks are doing poorly.

that active managers should outperform the index

in some historical bear markets, but in other bear markets

This should not instill confidence in anyone betting

on active management to save them in a downmarket.

If active funds do not offer any protection

when stocks fall, then there is no basis to say

that index funds are a relatively risky investment.

We know that the market as a whole is risky.

as investors expectations about the future change.

In other words, the risk of the market is a priced risk.

An active manager is still taking on market risk

The risk that their bets will end up paying off.

I would argue that active management is far riskier

than index investing because active management

of risk that does not have a positive expected return.

Another common reason to avoid index funds is

that you get no control over your holdings.

This is another great story without any data to back it up.

The problem with only picking the good stocks is

that there is no way to tell what a good stock is.

There is a massive difference between the quality

of a company and the quality of its stock returns.

and a Netflix shares were on a massive growth path.

Domino's pizza had stock returns that dominated all

It takes some serious predictive ability to successfully bet

My example is descriptive of how stock returns work.

Of the roughly 26,000 stocks that appeared

from 1926 through 2015, only 1000 of them were responsible

for all of the market returns in excess of treasury bills

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Reasons to Avoid Index Funds

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