Why Hasn’t Index Investing Exploded in Popularity?

ETFs have been around for quite some time now, and index funds for even longer. It is now possible for even the smallest investors to own a thoroughly diversified portfolio that tracks the market indices. So why hasn’t the mainstream public swarmed to these investment vehicles?

Sure index investing keeps growing in popularity, but much of this growth is probably accounted for by institutional buyers like life insurance and pension companies. There aren’t many individual investors out there deliberately seeking out these funds and investing their money. Millions even have access to these funds through their employer-sponsored plans, but still don’t make use of them. It’s ridiculously easy to set up a dummy-proof investment strategy all but certain to deliver long-term growth, so it’s unfortunate that so many neglect to do so.

I don’t believe the financial sector in general wants people to realize how simple investing can be, for an obvious reason; their profits largely depend upon making people believe that investing has to be difficult. Several examples:

1.) Financial advisors need people to feel ill-equipped to manage their own investments. The less confident their clients are about their own abilities, the better chance a financial advisor has to profit off of them.

2.) CNBC and all other investing networks and programs need investors to overcomplicate things. Passive index investors don’t waste time watching the garbage on CNBC, waiting to hear about their investments. They’re out doing something more enjoyable.

3.) Online brokerage firms’ profits depend upon getting people to sign up for accounts and squander half their investment capital on transaction costs They love to perpetuate the message that you can only win by ‘taking control of your investments’ by becoming an active trader (I’m thinking about those E-Trade commercials with the day-trading baby).

Td Ameritrade probably hates buy-and-hold customers like myself who only have a handful of transactions a year (I used to do otherwise, but I’m beginning to wise up now). They honestly don’t care too much if their customers succeed; what they want is to rack up as many $10 commissions as they can.

4.) Mutual fund companies need us to believe that their so-called professional management is the ticket to investing success. They love to hype the extraordinary market vision they have as financial gurus. What they don’t tell you is this; almost no mutual funds manage to beat the market consistently for a considerable length of time, especially when expense ratios are figured in.

Don’t get me wrong- mutual funds were without a doubt one of the most incredible financial innovations of the 20th century. They can be a highly useful tool for long-term wealth creation. However, with very few exceptions, they have proved mathematically inferior to passively managed funds.

Scare tactics:

The extremely broad investing field thrives by making it all seem threatening and complicated. The industry spends billions upon billions of dollars each year propagating this message, so of course it’s going to make regular John and Jane investors feel overwhelmed and intimidated.

John and Jane could set up a incredibly easy plan that invests passively in the indices and basically runs on autopilot, saving them money, time, and stress. Instead, it’s more likely that they opt to turn their investment decisions over to a financial advisor who charges $75 commissions or buy a mutual fund with a 2.5% expense ratio (or heaven-forbid trying to become a day-trader in their free time). The sharks in the investment field claim yet another victim…

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