Wednesday, August 12, 2009

Reports of the death of passive investing are greatly exaggerated

This post is a bit off my usual NH beat, but I found it an interesting and timely subject, especially for anyone planning for retirement or managing their own investments in these tumultuous times.

Many consider John Bogle, the founder of The Vanguard Group, to be the father of passive index fund investing.  Mr. Bogle pioneered the creation of low-cost index funds  at a time when the rest of the investment industry was pushing expensive specialized funds designed to beat the market.  (Mr. Bogle was also the inspiration for a great online investing forum called The Bogleheads.)

Mr. Bogle's groundbreaking practical work at Vanguard was nicely buttressed by some academic work by Professor Eugene Fama called The Efficient Market Hypothesis (EMH).  In short, the EMH says that it's nearly impossible for the average investor to reliably beat the market and that for most people, the best approach is to build a well diversified, low-cost index fund portfolio.

I regularly follow Felix Salmon's Reuters blog about all things finance and today he published a post about the EMH.  As often happens in the blogosphere, the post isn't nearly as interesting as one of the comments, which linked to a video where Professor Fama, discusses the state of his theory as of today (well, actually yesterday).

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.