• Matt Morizio

The Rise of Mediocrity - Index Funds and ETF's


ETF’s (Exchange Traded Funds) and index funds are taking the investment world by storm. According to the Financial Times, they now account for 23% of all US trading by share volume, 30% by dollar value. In other words, they are popular, very popular… just not with us at Beck Bode.

ETF’s and index funds are investment products designed to track a specific index of the market. For example, the S&P 500 index represents a snapshot of the overall health of the stock market. An S&P 500 index fund, therefore, will invest in some or all of the 500 companies in the S&P 500, and the goal of the fund is to track or mimic the S&P 500 index, hence the name “index fund.”

The majority of ETFs and index funds are passively managed, meaning there isn’t someone actively making trades within the fund. Instead, these funds operate under a “set it and forget it” approach. The fund manager buys securities to mirror a certain index or sector of the stock market, and once it is set, very few changes are made. That begs the question, why would a passive fund gain popularity in recent times?

Passively managed funds are typically cheaper to invest in. That's emotionally appealing, but does cheaper always mean better? Apple doesn’t think so.

Another argument is the lackluster performance of their counterparts, actively managed funds. Over 80% of active managers don’t beat their target benchmarks (the index they are comparing their own performance to). For long term investors, i.e. anyone investing for 3+ years, it’s emotionally easier to bet on the American economy by buying an S&P 500 index fund and setting your investments on auto-pilot, assuming the US economy will go up over time.

Otherwise, you could wind up in a situation where you are paying higher management fees to an active manager who underperforms against their benchmark. Over payment for under performance - that’s a double whammy.

Even though the odds of beating a benchmark are against me and I will pay more for an actively managed portfolio, I don’t own any index funds. ETF’s and Index Funds are designed to track an index, to remain in the middle of the pack, to be average, and I never have nor will I ever intentionally decide to be average.

As Ray Dalio, one of the world’s most successful hedge fund managers, said in his recent book, Principles, (and I’m paraphrasing) the highest achievers he knows would all rather try and fail miserably than not try and remain average.

I don’t live my life according to the majority, so why would I consider investing like everyone else? Let me explain:

  • Less than 10 months passed between the first day I met my wife and the day we got married (12/26/09 - 10/15/10).

  • I was drafted twice in the MLB First Year Player Draft (San Diego Padres and Kansas City Royals), and I played 5 seasons in the minor leagues.

  • I am 33 years old with my fifth child on the way, and my oldest is 5.

  • I have 24 chickens, 2 ducks, and 3 goats.

  • My wife and I have decided to home school our children.

  • I get up most mornings at 4:30am so I can train at Cressey Sports Performance, anything but your typical gym, where the music is loud and the clanging of weights is louder, and I love it.

I’m not exactly the poster child for conformity.

No, I’m not an adrenaline junky or some proud anti-establishment hipster. I relate to people who don’t do things a certain way just because everyone else does them that way. I identify with big dreamers who are relentless in their pursuit for greatness no matter the odds.

I can't stress it enough - being someone that is more afraid of being average than is afraid of failing, why would I settle for investing in something that is intentionally designed to be average? If you can relate, why would you settle?

Instead, if you’re like me and there aren’t enough podcasts/audiobooks/seminars to satisfy your need to learn and improve every day, ETF’s probably aren’t for you, either, not because they aren’t solid investment choices but because they don’t line up with who you are and how you’re wired. They don’t represent you just like they don’t represent me.

For that reason you’ll never feel excited about your investment choices, and believe it or not, investing can be exciting.

My advice is simple, in everything you do, including how you invest, make sure it accurately represents who you are and what you’re all about. If it doesn’t, make a change.

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Investment advice offered through Beck Bode, LLC, a fee-only Registered Investment Advisor in the Greater Boston area.