How index funds work: why doing nothing beats most experts
Index funds vs stock pickers: who wins after 20 years?
Professional fund managers study companies all day, and in some years most of them beat the market. Then look at 20 years of their results. Who is ahead at the end?
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1
The years go by, and the noticeboard fills up. Rono's fund wins the first two years. Then it loses three in a row. After five years, your boring fund is a little ahead. "Bad luck," says Miva.
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2
But is it only Rono? Funds like his, where people pick what to buy, are called active funds. Twice a year, S&P, the company that keeps the S&P 500 list, checks all of them against the index.
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In most years, more than half of these funds do worse than the S&P 500. But not every year. In 2005, 2007 and 2009, most of them did better. So one good year is easy to find.
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Now count over many years. In the year 2024 alone, 65 funds in 100 were behind the index. Over the 20 years up to 2024, 92 in 100 were behind. The longer you look, the fewer experts are still ahead.
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Picture 100 experts, each with a team, years of study and computers that never sleep. After 20 years, about 8 of them are ahead of a fund that just copies a list.
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Rono's team is clever, and it works hard. Your fund only follows a list. So how can a fund that picks nothing end up ahead of nine experts in ten?
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Go further
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