Why people avoid index funds

Saturday, 18 February 2012 16:03
moneylogo_optBY WARREN BOROSON

It’s a mystery.

Although almost anyone with any brains recommends that investors load up on index funds, relatively few investors do. Even Warren Buffett, who has beaten the pants off index funds, has recommended that ordinary investors go the index-fund route.

OK, generally I avoid index funds, too. I do have some exposure, via an annuity, but not much.

What’s the reason?

I’ve heard John Bogle, that great advocate of index funds, say that buying an index fund is like kissing your sister. Boring.

Index funds do have decided advantages:

Not that it’s impossible to beat index funds. Vanguard’s actively managed funds tend to do better than its index funds. Why? A key reason: They’re also relatively cheap to run.

Still, years ago a Vanguard spokesman told me that in general people should invest 80% in index funds – and 20% in Vanguard’s actively managed funds.

Granted, index funds have drawbacks. They’re usually oriented toward growth stocks, toward hot stocks. Which are, perhaps, overpriced. Although, these days, other index funds are available, index funds that are “value” oriented, such as those that target relatively cheap stocks that pay generous dividends.

Okay, to cut to the chase. The basic reason why so many people (like me) avoid index funds is that we’re constantly out to prove our worth. Maybe our parents didn’t express their love for us enough, or maybe they conveyed to us that, to keep their love, we had to excel. Whatever the reason, every day in every way, we’ve got to prove that we aren’t life’s losers. It is a constant challenge. And you don’t prove how superior you are by buying index funds.

We’re type A people. While there’s doubt these days that Type A people are really more prone to heart attacks (as was originally alleged), we do exist.

The following comes from a Website: “People with Type A personalities are often described as aggressive, ambitious, controlling, business-like, highly competitive, time-conscious, impatient, preoccupied with status, workaholic, hostile, tightly-wound…. The other end of the spectrum, or what some like to call an easy going personality, is called Type B personality.”

Society certainly needs lots and lots of Type A people -- aggressive, determined, ambitious, competitive. But, for their own financial health, we should persuade most of them to tilt their portfolios toward index funds.

Of course, another key reason why investors rarely buy index funds is that there are many people whose livelihoods depend on people buying something other than index funds.

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