Dan Solin

Invest With the Silent Minority

by Dan Solin

A routine report from Morningstar contains some great advice for investors, if you know how to interpret it. The report notes that passively managed funds (basically index funds) had a net inflow of more than $76 billion in 2011. In stark contrast, actively managed funds, where highly paid fund managers attempt to beat the returns of a designated benchmark, had net outflows of $9.4 billion.

Here’s the hidden gem: The market share of actively managed funds fell to 85.2 percent, while long-term passively managed funds increased to 14.8 percent.

Here are some reasons why you want to be part of the silent minority of investors who have stopped participating in the mug’s game of trying to pick active managers who can beat the markets:

Follow Nobel Prize winning advice. The silent minority follows the recommendations of Nobel Laureates in economics. You can find quotes from Paul Samuelson, William Sharpe, Daniel Kahneman, and Merton Miller advising index funds here.

Join the ranks of great investors. You have a choice when it comes to investing. You can listen to hot tips from your broker who didn’t see either the crash of 2009 or the ensuing recovery coming, or follow the views of Warren Buffett, Peter Lynch, and David Swensen, among many others, and invest in index funds. It should be a no-brainer.

Utilize the data. Would you take a new medication based on hearing someone talk about it in an elevator? Or would you want to see peer-reviewed data indicating that it worked? Most investors listen to the undocumented musings of talking heads on television or the views of their supremely self-confident broker or adviser. On almost every investment issue, there is a wealth of hard data. You should insist on seeing this data before you make any investment decision.

The data supporting the investing style of the silent minority is overwhelming, which is why your broker doesn’t want you to know about it. If you did, you would fire your retail broker and capture market returns, using a globally diversified portfolio of low-cost index funds. You can find a collection of 626 articles on the benefits of index investing here.

Avoid swimming with the sharks. Proponents of active investing consist of virtually all brokerage firms, mutual fund companies, market timing services, financial media, and the training programs of brokerage firms, which focus on sales and not long-term risk and return data. Investors who have listened to these experts have paid a steep price for their reliance on their largely unsubstantiated views.

Studies have consistently shown that average stock fund investors obtain about one-third of the returns of the S&P 500 index over a twenty-year period. Active investors stand in sharp contrast to the distinguished academics, successful investors, and quantitative data supporting the views of the silent minority.

Don’t continue to be fooled by a system geared to enrich those who provide “market-beating” financial advice at the expense of their clients. The silent minority has figured this out and found a better way. So should you.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read,The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.