Has Index Fund Growth Impaired Markets?
One concern about the increasing popularity of index funds is whether the decline in active management has impacted the function of markets.
Every year at this time, NCAA March Madness thrills fans and creates so much interest that an estimated one in four Americans filled out a bracket to try to predict who will win it all. (1) I really enjoy watching the games and always fill out a bracket in a pool with my family. This year, I could not help but see connections between investing and March Madness.
An informed approach improves your odds.
Good luck and good strategy are not the same.
The thrill of participating in a March Madness pool with a lot of people comes from the possibility of winning the pool.
There is always next year.
While there are certainly similarities between March Madness and investing, it is crucial to recognize the key differences. When you are picking brackets, sometimes the only way to be the big winner is to take big risks on underdogs, which can be a fun and exciting game to play. With investing, it is better to take a measured and disciplined approach with the goal of pursuing higher expected returns while reducing risk. So enjoy March Madness, but do not confuse the risk of filling out a bracket with the risk of investing in markets.
This post was written by David Booth (Executive Chairman and Founder of Dimensional Fund Advisors). This article was also first distributed by Dimensional Fund Advisors. Shore Point Advisors adheres to a similar investing philosophy to the one that is implemented by Dimensional Fund Advisors, which is the reasoning for the reposting of this article.
FOOTNOTES
(1) “March Madness Viewership, Bracket Participation Poised for Jump in 2023,” Morning Consult, March 14, 2023.
(2) “The Impossible Allure of the Perfect Bracket,” New York Times, March 12, 2023.
(3) In US dollars. S&P 500 Index annual returns 1926–2022. S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
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