If Index Investing Is so Great, Why Doesn't Everyone Do It?
Because they have been fed too much financial bull$hit
You should be skeptical of investment advice you see online.
I know that might be a strange message coming from an online finance writer who just published his first book on investing and—*SPOILER*—has a second book on investing coming soon.
But it’s true. Financial bull$hit is everywhere. The finance discussions on Twitter, Instagram, and TikTok are a hellscape of finfluncers pushing insurance schemes, crypto scams, and highly active stock market strategies like stock picking, day trading, and high-fee mutual funds.
When listening to investment advice, Here’s the first thing you should ask yourself:
“Is this person giving me this advice because it’s in my best interest or because they make the most money by promoting this particular investment?”
If you can find a truthful answer to that question, you’ll be able to avoid the majority of online financial bull$hit.
Is the TikTok star telling you how to use whole-life insurance as an investment vehicle because it’s the best use of your money or because they get a big fat commission from an affiliate link?
I’ve spent a frankly embarrassingly large portion of my adult life reading academic research papers and studying finance. The more research I read on investing, the clearer it is that investing has basically been solved for the average person.
Allow me to distill over 100,000 words I have previously written about investing into one sentence:
“Invest in a handful of low-cost index funds diversified between stocks and bonds and domestic and international assets and resist the urge to sell for as long as you possible can.”
That is all you need to do to maximize your odds of success as an investor.
And yes, I sell a book that outlines this in detail, and I make about $6 for each book I sell. I promise you I could be making exponentially more money pumping financial bull$shit like crypto, whole life insurance, and day trading.
My first job out of University was to sell whole life insurance and high-fee mutual funds. Once I learned how terrible the products I was shilling were, I quit and never returned to the financial services industry.
This brings me (at last) to the point of today’s article, which is to tackle the question:
“If index funds are so great, why doesn’t everyone invest in them?”
A recent paper, appropriately titled “Misperceived Returns to Active Investing,” provides a simple answer to that question: People (wrongly) believe that active investing strategies will outperform passive index investing.
Which, if you think about it, is the only rational explanation. I would gladly dedicate more time to actively managing my portfolio if there were evidence that I would make more money doing so. But that isn’t the case; investing is one of the few arenas in life where the less you try, the better your results.
In this study, the researchers surveyed 7,588 users of a “social trading platform”—the type of platform where active and speculative investing is popular.
When asked why so few of these people invested their money in index funds, the answer was clear; they believed they could make more money actively managing their portfolios.
The surprising result was that these active investors responded positively to financial education. When presented with evidence of why and by how much passive index funds outperform active investing strategies, the participants in the survey were nearly 18% more likely to believe index funds would outperform in the future.
The truly amazing result of this study was that this financial education not only impacted their beliefs but led to direct action. Four months after the study, participants who received the financial education about index funds increased their investment in index funds by 37% compared to the control group.
Telling investors the truth nudged them in the direction of index investing.
This gives me hope as someone whose entire writing career has been centered around battling financial misinformation and bull$hit investing scams. Some days I open my phone to see a financial bull$hit artist on TikTok reach 100X more people than I do, and it feels like I am fighting a losing battle.
But if telling people the truth about investing can steer even a few people away from the financial bull$shit, and towards a simple portfolio of index funds, that is all the motivation I need to continue growing this publication.
If you have not already, you can pick up your copy of The Rational Investor here.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
Currently reading your book “Rational Investor”. Nice easy read, makes total sense. Footnotes are a bonus.
During my early investing years, I favored actively managed mutual funds over index funds expecting better returns. Well the research you mention above tells you how that story turned out. Once I transitioned to low-fee, index funds, I have not looked back. I have a few tax free accounts where mutual funds are the only investment options and I now only use index funds in those accounts. I check in on those accounts quarterly, especially the international index fund to understand if there was any major shift in regional and country holdings/allocation. Additionally, I use my quarterly, macro-economic mapping to decide how much to allocate to each sector and when.
Cheers, Ben!