Practical Cents #12: Why We Love Indexing

Hello everyone and thank you for joining me. When it comes to investing, it feels like there is an unlimited number of choices. And choice is a great thing. It means people have options and that the products and strategies better be competitive if they want to survive, all of which benefits you, the investor. But with so many choices, it can also be overwhelming and lead to the dreaded paralysis by analysis, which is why at Presilium, we love indexing.

For those unfamiliar, indexing is an investment strategy that allows you to own all companies in the market and lets the market decide how much of each individual company to own. As a result, you get the returns of the market, which have been exceptional over the last century. Compare this with an active investment, where a manager is selecting not only the companies to own but the percentages in which they own them, placing calculated bets in an attempt to beat the market. And today, I'd like to take a few minutes to tell you why we choose to index.

First, performance. Point-blank, it's difficult to beat the market. And I don't just mean difficult, as in it's challenging but with more work, more research, and more practice, it becomes doable. I mean difficult in the statistically next to impossible way. S&P Global keeps a scorecard of the performance of active managers against their index counterparts, essentially their measuring stick. And the data is pretty compelling. Over 1 year, about half of all active funds fail to beat their index benchmarks, a coin flip, not bad. Over 5 years, that number grows to about four out of five active funds failing to beat their benchmarks. Over 10 years, that number grows further to nine out of 10 active funds failing to beat their index benchmarks. When creating a financial plan for decades to come, why would we ever choose something that has a 90% likelihood to underperform?

Bringing me to point two, cost. According to data from Fidelity Investments, the average difference in operating cost of an active investment versus an index investment is over half a percentage point. Compounded over the long term of your investing lifetime, and we're talking about hundreds of thousands, if not more, in dollars returned to you, the investor. And in the words of the index pioneer, Jack Bogle, you get what you don't pay for, meaning the costs not paid on your investments directly result in increased returns. That's right, simply by choosing not to play the game of what stocks are going to do best, you've effectively added a half a percentage point to your annual return.

And when it comes to investing, long-term is our timeline of choice, which brings me to my favorite part of indexing. You own the winners. Perhaps the greatest benefit of indexing is that the gains accrue to the winners. Said differently, by indexing you own the market, and by owning the market, you own the companies driving the returns. As of January 2026, the S&P 500 is up more than 2700% since 1987. Also since 1987, roughly 75% of companies in the S&P 500 have underperformed the index. Close to 50% of companies in the S&P 500 have lost money. And around 8% of companies in the S&P 500 during that time have gone to zero, with the most famous example being Enron, who was replaced by Nvidia. Yes, you heard me right. Enron, the company with arguably the greatest accounting scandal of all time, when kicked out of the S&P 500, was replaced by Nvidia, the index's all-time most valuable company. And while it doesn't always work out that way, what does always happen is that in indexing, the losing companies are replaced by the winning companies. Think of it as Darwin's natural selection at work in the capital markets. So if Nvidia or any other company falters, there will be another waiting to replace it and drive the next wave of innovation and growth.

Now let's bring this home. Let's circle back to choice. The average adult makes 35,000 decisions each day, some big, some small. Rather than being forced to use our time to make any number of investment choices each day, week, month, or year, we've chosen to index, to take those exceptional returns the market gives over the long run and repurpose our time elsewhere. And with this time, we're able to focus on the areas that truly matter, the areas that we can actually make an impact on, such as tax planning by proactively reviewing client tax returns, helping our clients to create or update their estate plans, evaluating health insurance options for those who want an early retirement. Because these are the strategies and tactics that truly matter and make a difference in a world of commoditized investments, underperformance of managers, and pontification of where the market is headed. Thanks for watching, and until next time.