Professor Charles D. Ellis of the Rebalance Investment Committee details the human reasons we fall for the idea of active management, even though indexing is simpler and more effective. See more on the power of indexing.
There are several reasons why people don’t index. One is we all think that we could do better. Who in walking down the aisle to get married really thinks that they’ve got about a 50/50 chance of this working out. Everybody thinks they’re going to work better.
Why do people go to Las Vegas? Well, partly because it’s fun and exciting and different, and partly because they kind of think they might be able to make it work out. Now, that’s who we are. And if we didn’t have that positive, optimistic, go-for-it, come on, try, try, try, we wouldn’t play sports. Half the teams always lose. We wouldn’t work as hard as we do. We wouldn’t be as creative and have as many brilliant new inventions.
Now, the whole world would fall apart if we all said, “You know, just not going to try. I’m not going to do that. I’m going to just sort of ease back.” We say, “You can’t be lazy. Lazy is a bad thing.” And that gets flipped over into the wrong feeling about indexing.
What I like about indexing is really simple: I’ve got the smartest people in the investment world working full time, at their expense, to set the prices for me. And they’re all out there working full time, every single one of them, to set the prices right. And I’m perfectly prepared to accept, because I’ve got better things to do with my time. And I know they can do better than I can do because that’s what they’re doing all the time. And they’re the best, capable people at that kind of work.
I’ll let them set the prices. And I’ll accept whatever they say. And earlier in a conversation, I was saying the two most useful words for happy relationship are, “Yes, dear.” And that’s a lot to do with indexing. If you say, “You know, if the really, really, really smart people have figured out what the price ought to be, why do I have to go try to reproduce their effort and work? And why do I think I’m going to come up with a better answer?” I’ll take what they’ve accepted. Then I’m going to save the dickens out of costs because I’m not going to pay anywhere near what most people are paying.