66 | In Defense of Indexing: Meet People Where They Are

Indexing is a style of investing in which, instead of intentionally selecting a subset of companies from a group, you decide to own the entire group.

Groups of companies come in all shapes and sizes - a group could be all of the big companies in the United States, all of the energy companies in the world, all of the small companies in developing countries, or any other combination of geographies, industries, or company sizes.

Indexing meets people where they are.

When it comes to investing, many people struggle to understand and fully appreciate the details of a specific investment strategy. This is not a problem - real limits of time, experience, and interest create significant barriers to developing even a baseline understanding of investing. Indexing acknowledges this reality.

We know that relative wealth is more important to people than absolute wealth. We also know that people feel the pain of losses more than the pleasure of gains. Indexing allows your investing experience to be like many people instead of different from most. Inherently, indexing allows you to “keep up” with others in seasons of positive returns and ensures that you don’t “lose ground” relative to others in seasons of negative returns.

We know that people dislike paying taxes, particularly when they might not fully appreciate or understand why they are paying them. The feelings are compounded when taxes are generated from one account and the tax bill is paid out of a bank account many months later. Indexing reduces turnover which in turn reduces ongoing taxes.

We know that people dislike paying fees, particularly when they might not fully appreciate or understand why they are paying them too. Given our human tendency to demand short term results and feel losses more acutely than gains, it can be extra difficult to pay fees and see an index fund outperform a more expensive investment even for a brief season. Indexing requires minimal due diligence in company selection which continues to drive fees towards zero.

We also know that simplicity beats complexity. Outside of buying individual stocks and bonds, indexing is about as simple as investing gets – a group of companies and you own them all. No layers of decision-makers, portfolio managers, fund managers, or unnecessary complexity and activity to abstract what is actually happening.

Whether an investment expert or purist likes indexing or not, it meets people where they are.

Additional Reading

Good Enough by Morgan Housel

The Error-Proof Portfolio: Why the Best Questions Might Be the 'Dumb' Ones by Christine Benz