The Rise of Indexing: Shaping the Future of Investing

The rise of indexing has crossed a new threshold. Passive strategies now make up more than 50% of all investment assets. Recent reports show we’ve crossed the Rubicon of passive vs active investing. Indexing has won! The reasons are clear: indexing outperforms active management most of the time. And, its much easier for investors to achieve better returns with less work by simply using index funds. The results are true for both novice and wealthy investors alike.

So, as passive indexing continues gaining market share, its expected to make up the clear majority of investment assets in the coming years. How might this impact the balance between active vs passive when active makes up only a small share of total holdings? And, will the herd of passive investors eventually create opportunities for active management again? This blog post will explore these questions and suggest ways investors (and their advisors) should respond.

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What is Indexing in Investing?

Indexing in investing refers to a passive investment strategy where investors buy index funds or exchange-traded funds (ETFs) that replicate the performance of a specific market index, such as the S&P 500. This approach aims to match the market’s returns rather than trying to outperform it through active management. Indexing has become increasingly popular due to its simplicity, lower costs, and consistent performance, often outperforming active management over time. With passive strategies now comprising over 50% of all investment assets, indexing has emerged as a dominant force in the investment landscape.

Impact of Indexing Trends

What if passive investors eventually make up 90% of all stock market holdings? Frankly, I’m looking forward to a day when active management is worth the trouble. When active managers can provide their clients with alpha. I’d love to be able to toil away creating valuation models and recommending which stocks to buy. Maybe this is because I’m a stock market nerd and dream of a world when stock market research pays off. So, the closer we get to total domination by indexing, the closer we get to a day when active managers can take back market share; because of superior results.

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Adapting Investment Strategies

Investors off all shapes and sizes, including novices and wealthy investors alike, should embrace indexing and understand why it works. Even if investors decide to continue picking their own stocks or paying someone to do this for them. We should at least understand why indexing works and how we can use indexing to our advantage.

This includes benchmarking returns against index funds and using index funds to screen for ideas.

But the main way investors should respond to the rise of indexing is not to hold their ears and close their eyes. Investors should use the power of indexing to their advantage. Whether this is part of a core-satellite approach or as a way to target enhanced income.

How Should Investment Advisors Respond to the Rise of Indexing?

Investment advisors should respond to the rise of indexing by embracing its core values. Markets are efficient enough to where most fund managers fail to beat their passive benchmarks. So, if you can’t beat them, join them. Investment advisors should incorporate passive strategies into their client’s portfolios and focus on value added advice around taxation and psychology instead.

A key competitive advantage that investment advisors have is the human element. Have you ever tried calling a 1-800 number for customer service and been put on hold? And, when you do get to speak to a human, you’re treated like a number, not a person? This is where investment advisors hold an edge: personal service.

Plus, investors are riddled with emotional bias. So, investment advisors can help their clients cut through this drag on returns by coaching them into sticking to long-term investment plans, rather than letting emotions rule their decision-making process. Keeping clients invested consistently and over the long-term is a hugely valuable service that investment advisors should tout more often.

Unfortunately, too many investment advisors turn to private equity and other alternative investments with higher fees and less transparency as a crutch. They figure the best way to beat indexing is to offer what indexing lacks: high fees and opaque results.

The Rise of Indexing Has Created New Opportunities

The rise of indexing underscores a pivotal shift towards passive investing strategies. Because investors prefer simplicity, lower costs, and transparency. As the rise of indexing continues to reshape the investment world, both investors and investment advisors are encouraged to adapt and thrive within this new paradigm. For investors, the move towards index funds should be seen not as a limitation, but as an opportunity to harness the efficiency of passive investing to achieve financial goals with less effort and greater clarity. Embracing a strategy that includes indexing can serve as a solid foundation for a diversified portfolio, enabling investors to focus on long-term wealth accumulation while minimizing unnecessary risks and costs.

Investment advisors, on the other hand, should highlight their enduring value through personalized service, emotional coaching, and strategic advice that extends beyond the scope of what index funds can offer. By integrating passive strategies into their clients’ portfolios, advisors can concentrate on delivering value through comprehensive personalized service, tax optimization, risk management, and helping their clients battle emotional bias—areas where their expertise and human touch can significantly impact their clients’ financial well-being.

The Rise of Indexing: Our Family Office

As we navigate this evolving landscape, it is essential for both investors and advisors to stay informed, remain flexible, and continuously seek ways to optimize investment strategies in alignment with the principles of simplicity, efficiency, and long-term focus that have propelled index funds to the forefront of the investment world. Whether you’re exploring the benefits of passive investing for the first time or seeking to refine your investment strategy, Markdale Financial Management is here to provide guidance, insights, and the personalized service you need to achieve your financial objectives. We invite you to contact us, sign up for our free monthly newsletter, or schedule a complimentary review of your situation to explore how we can assist you in navigating the investment landscape with confidence and clarity.

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