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Most Arguments Against Index Investing Aren’t Compelling (Part 2)

Any downside protection? Reduce the strength of corporate oversight?

Alex Bryan 13 November, 2019 | 13:03

In part 1 of this article, we looked at three arguments against index funds. Here we will discuss some other arguments.

4 | Passive funds own all the bad stocks.

This premise is true, but the implication that it makes passive investing a bad strategy is not. Think about the payoff structure for stocks. The most they can ever lose is 100%, but their upside is unlimited, so a few big winners can make up for the market’s many losers. Passive funds own them all. Those who attempt to avoid the bad stocks risk missing out on the big winners, which have historically accounted for the lion’s share of the market’s long-run returns.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

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