The theory behind indexing is that picking a mutual fund is essentially a crap shoot. You may pick a fund that returns more than the index, or you may pick a fund that returns less. On average, if you invested in ten funds, you'd likely generate the same return as the index. Except you'd be paying a higher expense ratio for the privilege of being actively managed. Paying a .80% expense ratio or higher on a mutual fund versus a .07% on an index fund results in a six-figure difference over the long term.
The graph showing mutual fund returns towering over index returns is laughably dishonest. Of course with hindsight its not difficult to find a few mutual funds that significantly outperformed the index. That's child's play. The trick is picking the mutual fund that's going to outperform the index for the future. Historical returns tell us nothing. You're falling prey to survivorship bias. The mutual funds that are around today are simply the ones that haven't been shuttered because they kept losing money (this is most funds).
I wouldn't really consider indexing the be-all, end-all strategy of investing. It's simply the best way for the average investor (who isn't particularly financially savvy and who doesn't have a lot of time to put into investment research) to invest his money over the medium and long-term. I mean, what's the alternative? Index funds are statistically proven superior to mutual funds on an average basis. So do you just buy a mutual fund and hope to get lucky and beat the average? In that case, if you just want to rely on luck, why not simply buy a single stock and hope for the best? Hell, why not just go down to the nearest casino and lay it all on black?
There's a reason that you see pushback in the financial press/sector against indexing: because it significantly eats into their profits. It also makes most fund managers look like complete idiots and reveals that all their research and trading is for the most part worthless, because on average they can't beat the market over the long term. This means that their service is less than useless because they are charging you money while producing zero net benefit. They are essentially parasites.
There is some reasonable criticism of indexing in regards to the excess weight it places on the highest market cap stocks in the index. But there are plenty of ways around this. You aren't limited these days to a simple S&P 500 market index. There are hundreds of ETF indexes you can buy that cover a wide range of market caps, countries/regions, sectors and investment types. This means you could buy "South American mid-cap" ETFs or "U.S. high-yield corporate bond" ETFs or "Gold and silver mining" ETFs, etc... This gives you significantly more flexibility in regards to your allocations and doesn't lock you in to simply owning a mini-slice of the entire market. It just allows you the benefits of a diversified portfolio without having to pay ridiculous expense ratios to mutual fund managers for absolutely no reason.
The graph showing mutual fund returns towering over index returns is laughably dishonest. Of course with hindsight its not difficult to find a few mutual funds that significantly outperformed the index. That's child's play. The trick is picking the mutual fund that's going to outperform the index for the future. Historical returns tell us nothing. You're falling prey to survivorship bias. The mutual funds that are around today are simply the ones that haven't been shuttered because they kept losing money (this is most funds).
I wouldn't really consider indexing the be-all, end-all strategy of investing. It's simply the best way for the average investor (who isn't particularly financially savvy and who doesn't have a lot of time to put into investment research) to invest his money over the medium and long-term. I mean, what's the alternative? Index funds are statistically proven superior to mutual funds on an average basis. So do you just buy a mutual fund and hope to get lucky and beat the average? In that case, if you just want to rely on luck, why not simply buy a single stock and hope for the best? Hell, why not just go down to the nearest casino and lay it all on black?
There's a reason that you see pushback in the financial press/sector against indexing: because it significantly eats into their profits. It also makes most fund managers look like complete idiots and reveals that all their research and trading is for the most part worthless, because on average they can't beat the market over the long term. This means that their service is less than useless because they are charging you money while producing zero net benefit. They are essentially parasites.
There is some reasonable criticism of indexing in regards to the excess weight it places on the highest market cap stocks in the index. But there are plenty of ways around this. You aren't limited these days to a simple S&P 500 market index. There are hundreds of ETF indexes you can buy that cover a wide range of market caps, countries/regions, sectors and investment types. This means you could buy "South American mid-cap" ETFs or "U.S. high-yield corporate bond" ETFs or "Gold and silver mining" ETFs, etc... This gives you significantly more flexibility in regards to your allocations and doesn't lock you in to simply owning a mini-slice of the entire market. It just allows you the benefits of a diversified portfolio without having to pay ridiculous expense ratios to mutual fund managers for absolutely no reason.
[size=8pt]"For I reckon that the sufferings of this present time are not worthy to be compared with the glory which shall be revealed in us.”[/size] [size=7pt] - Romans 8:18[/size]