Advocates of active fund management often suggest that index investors are settling for mediocrity — in other words, average returns. But is that actually true?
There have been very few better investments in recent decades than an S&P 500 index fund from Vanguard. Yet when Vanguard’s founder, Jack Bogle, first gave investors the option of simply tracking the S&P 500, the investing industry poured scorn at the idea. It was dubbed “Bogle’s folly” and was even criticised as “un-American”.
The response from one of the largest fund managers, Fidelity, was particularly dismissive. Edward Johnson, who was Fidelity’s chairman at the time, is reported to have said, “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns.”
Over the years, the claim that index fund investors are “settling for average” has been a common refrain. We still hear it regularly today. But is it actually true? Do indexers really receive average returns? The simple answer is No.
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