After many years of data collection, passively managed index funds have shown greater performance than their actively managed mutual fund counterparts. A major reason is the significantly lower fees they command; another significant factor is that humans (even experts) often make poor decisions when under pressure.
Studies demonstrate that those who invest passively tend to do better long term. Indeed, one of the greatest investors ever, Warren Buffett, recommends amateur investors invest passively.
Why? Emotions such as fear and excitement can be your worst enemies in investing. These impulses lead to hasty decisions, shortsighted views and often doing exactly the opposite of what should be done (selling large sums when fearful and buying when greedy).
Most of the financial services industry dislikes passive index investing because it reduces fees (and their profits), thus cutting into their profits. They have done everything possible to stop its rise – and have had some success: an astounding 70% of fund assets still favor active over passive strategies despite this number becoming smaller over time.
Some fund providers have reluctantly adopted Vanguard’s model in order to prevent becoming completely obsolete, yet some remain unhappy about doing so.
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