Always have a "Plan B"

"The big lesson that came out of academia – at least the one that’s on everyone’s mind today, is that it is hard, really hard, maybe impossible to construct a diversified portfolio that consistently outperforms the market.  The insight that a portfolio built to mimic an index would outperform most professional investors took a while to be accepted broadly.  But now that it has, the question being asked by more and more serious investors is, “Should I waste my time trying to find an active manager, or should I just index?”  Given recent trends, the answer is most definitely the latter.

"The historical rule on Wall Street is that every successful investment strategy that has ever been created gets too popular at some point.  There has never been an exception to this rule, until now.  Perhaps the capacity for indexing is so big and/or the ego of a certain percentage of investors is so large, that there will always be enough investors who want to make their own choices (maintaining the balance that gives indexing its advantage).  Perhaps not, and the rule will ultimately kick in at some point.  For now, indexing is king of the hill and its kingdom is expanding."

Excerpted from my latest column at ThinkAdvisor