The Fundamental Index - Chapter 4: The Virtues of Index Funds

It's safe to say that index investing has caught on all over the world; its primary competition - the legions of actively managed funds. Volumes have been written about the superiority of one approach over the other. Theory says that current prices are the market's best estimate of an investment's fair value, which should be the discounted present value of future cash flows. Those who believe that current prices are a reasonable approximation of intrinsic value should prefer index investing. Investors who believe current prices don't always reflect an investments intrinsic value will prefer active management strategies.

The one guarantee in investing is that costs do matter. After all, the returns an investor gets to keep are the returns after fees and expenses, and for that matter, taxes and inflation. As investors, we cannot know what our returns will be, but we do know that higher fees require higher returns just to break even, and high fees don't go hand-in-hand with higher returns.

A quick look at the markets shows North American indexes to be all in the red. The big news this morning was the disappointing earnings number from Bank of Montreal and the 27% decline last month in existing US home sales, to the lowest level on record. Regarding the former, trading revenues were the culprit; Regarding the latter, despite previous stimulus measures and low interest rates, which served to move purchases forward, demand has basically dried up.

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