Unit 3 · Level 1 · Index investing
Why beating the market is hard
Professional investing has an uncomfortable secret. Study after study finds that over long periods (10 to 15 years) the large majority of actively managed funds end up BEHIND the plain index they're trying to beat. Not because managers are fools; they're brilliant, and that's the problem. When nearly every trader is a well-armed professional, out-guessing the crowd gets brutally hard, and fees drag on every attempt.
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What you get asked
Over 10-15 year periods, how do most actively managed funds compare with their index?
The large majority lag their benchmark over long horizons, a result that repeats across countries and decades. The boring list is a shockingly tough opponent.
Why is it SO hard for professionals to beat the market?
Every trade needs someone smart on the other side, and prices already reflect what's publicly known. Add yearly fees, and even skilled managers struggle to stay ahead.
A fund where managers pick stocks trying to beat the index is called ___ investing.
Active = trying to beat the list; passive = copying the list. The twist of this lesson: the 'lazy' passive approach usually wins after costs.
Order the logic that leads many investors to index funds
This chain of logic comes from John Bogle, who launched the first index fund for ordinary investors in 1976. It quietly revolutionised investing.
A fund crushed its index for the last 3 years. What does the evidence say about chasing it?
In a market with thousands of funds, some will always be on a streak. It's mostly luck, and rarely repeatable. That tiny disclaimer 'past performance is no guarantee' is the most honest sentence in finance. 🐜
The rest of this unit
Why buying the whole haystack beats hunting for the needle.