Index Funds: The Shrewdest Investment Nobody Is Paid to Sell You

The best-performing investment product of the last half-century was laughed at on arrival, is ignored by every salesman in finance, and has quietly beaten roughly nine professionals in ten. This guide is the sales pitch nobody is paid to give you — passed on, in the Buffett spirit, by a merry self-educating — and wonderfully helpful — community called Shrewd'm.

Shrewd investors — the community this site belongs to — include a striking number of quietly successful investors, and a large share of their money sits in the least glamorous instrument that exists. Not because they lack sophistication, but because they did the arithmetic sophistication usually obscures. What follows is that arithmetic, and the story of why you have probably never heard it told straight.

The folly that beat everybody

In 1976 a stubborn man named John Bogle launched the first index fund for the public — a fund that would pick nothing, time nothing, and simply own the whole market at almost no cost. Wall Street christened it “Bogle’s folly”; one rival called indexing un-American; Fidelity’s chairman announced he could not believe investors would settle for “just average returns.” The launch hoped for $150 million and raised eleven — Bogle himself called it an abject failure. Hold that scene in mind, because everything since has been the market’s slow, complete revenge on that laughter.

The scoreboard, kept for decades

Standard & Poor’s has kept the score since 2002 in its SPIVA reports, and the verdict is not close. Over twenty years, roughly 92 percent of professional American stock funds underperformed the plain index they measure themselves against. Over fifteen years, out of twenty-two fund categories, the number in which a majority of professionals beat their benchmark was zero. And the pattern strengthens with time: the longer the race, the more surely the “average” fund that costs nothing runs down the brilliant one that charges. Settling for average, it turns out, means finishing near the front.

Warren Buffett found this so reliable that he staked a million dollars on it in public. From 2008 to 2017 — a decade he did not choose kindly, opening with the worst crash since 1929 — a plain S&P 500 index fund raced five hand-picked funds of hedge funds:

Buffett’s point was never that the managers were fools — many were brilliant. It is that their fees were certain and their edge was not, and certainty compounds.

Not an American quirk

Here is the part even well-read investors often miss — it is genuinely not commonly understood. S&P runs the same scorecard in Europe, Australia and Canada, and the answer is the same on every continent: after fifteen years, not one category anywhere shows a majority of active managers ahead. This is not a verdict on American fund managers; it is arithmetic. All the investors in a market, added together, are the market — so the average professionally-managed dollar must earn the market’s return minus its costs, everywhere, always. The only question was ever the size of the subtraction.

The Shrewd insight: the index fund does not win by being clever. It wins by refusing to pay for cleverness that, added together across a whole market, must cancel itself out — leaving only its bill.

Which raises the obvious question: if the evidence is this one-sided, on every continent, for decades — why did nobody ever sit you down and tell you? The answer is the most Shrewd-flavoured fact in all of finance, and it is the subject of the next page.