Index Investing seeks to replicate the performance of a specific financial market index by investing in securities such as index
funds or exchange-traded funds (ETFs) that closely track the performance of an underlying index.
Many investors pay a mutual fund manager or an investment advisor to perform an active investment process that is based on either
their opinion of specific securities (picking winners) or on a forecast of the likely occurrence of future events (being able to foretell
the future). Their goal is to produce a better return than that of a relevant financial market index by selecting some, but not all, of
the securities that comprise the index.
While it is possible that the investment performance of an active investment strategy may outperform that of a comparable indexed
investment strategy over the short- term by either skill or luck, it is not probable that this will consistently occur over longer time
horizons*. This underperformance occurs for two reasons:
1. The returns produced by securities in financial markets are zero-sum; meaning that over any specified time horizon, one-
half of the securities will be outperformers while the other half will be underperformers, when compared to the market
average. Regardless of varying degrees of skill or luck, laws of probability prevent all investors or active mutual fund
managers from only choosing securities that will produce above-average performance at all times.
2. The returns produced by securities in financial markets are also subject to numerous costs of ownership. These costs
include: trading commissions, bid-ask spreads and administrative costs which all combine to reduce realized returns over
time. These costs are a performance drag which results in the dollar-weighted performance of the vast majority of active
mutual fund managers falling short of the aggregate return of a comparable financial market index.
Therefore, given the unlikelihood of selecting an active mutual fund manager who can consistently outperform the market, we
believe that your portfolio will benefit from an index investing approach that minimizes costs so that you will achieve a return that is
similar to a financial market average.
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