Low Cost Index Investing

At IV Lions, low cost, passive index investing forms the foundation of our approach to managing client assets. It has been well documented that most actively managed mutual funds do not consistently beat the market.

In aggregate traditional active management must underperform passive management because of a theory Professor William Sharpe referred to as The Arithmetic of Active Management. In short, one investor can only outperform the market when another underperforms it. Mathematically the sum must always be zero (a zero-sum game). When fees are taken into account, active management in aggregate must therefore underperform passive.

Index investing involves investing in securities that track the performance of an entire market index such as the S&P 500. As opposed to trying to beat the return of the market, these funds deliver the return of the market (minus a small fee).

Index investing is not however a constrained or one-dimensional investing solution. Quite the contrary as the world of exchange traded funds (ETFs) has brought a tremendously diverse spectrum of investing possibilities, from commodity futures markets to real estate investing. Dozens of different markets can be tracked at low cost, allowing investors to collect a very diverse set of risk premiums (sources of return).