How Index Investing Can Lead to Above Average Results
Consuelo Mack / Intro: Well, this week’s guest is a globally recognized Financial Thought Leader, who has appeared exclusively on WEALTHTRACK over the years. He is Charles Ellis a leading consultant and advisor to institutions, endowments, governments and high-net-worth individuals for more than five decades. Founder of Greenwich Associates, a leading international business and investment strategy consulting firm which he ran for 30 years, Ellis has been studying how investment firms work throughout his career. He is the author of 17 books, including the investment classic, Winning the Loser’s Game, soon to be in its 7th edition. His most recent work is: The Index Revolution: Why Investors Should Join It Now.
Consuelo Mack: Now, you know that those of us who still believe in the ability of human beings to be above average …
Charles Ellis: Right; 80/20 rules.
Consuelo Mack: … and certainly on WEALTHTRACK we try to, you know, find the money managers who are above average on a consistent basis …
Charles Ellis: The easiest thing in the world. If you would like to be above average all you have to do is say I’m going to use my brains and I’m going to think about this question and the easy answer, which I will arrive at with an hour of conversation at the most, is to index rather than this crazy thing called “active investing,” which used to work in a different environment. It doesn’t work in this environment.
Consuelo Mack: Right.
Charles Ellis: So, if you would like to be above average that’s easy; index and you will be, clearly, decisively almost every year and certainly every decade, comfortably above and lower taxes and less anxiety and worry.
Consuelo Mack: However, if you index and you were buying index funds that are based on a market index…
Charles Ellis: Yes.
Consuelo Mack: … the fact is that you are going to have the market ups and you are going to have the market downs.
Charles Ellis: Yes.
Consuelo Mack: Most human beings do not like to have periods where they are actually losing ground and especially when its dramatic as we’ve certainly seen several instances in our lifetime. What about the theory and the practice that we will mitigate your downside loses and that we will protect you in the downside and that that requires active management? What about that argument?
Charles Ellis: That’s an interesting idea. It doesn’t happen to work because it turns out that active managers misunderstand markets about as often as they understand markets and they gradually, over time, reduce their total long-term rate of return because they have money in short-term investing.