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  • Identify the many Myths in the financial system, including the dream of “beating the market” through individual stock selection.
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Welcome to our site for the independent investor which was officially launched March 18, 2008. Become a member (it’s free) and enjoy full access to the site + receive on a preferred basis our newsletters. Our first newsletter commenting on TFSA's was emailed to members March 25. MEMBERS-PLEASE NOTE: Depending on your software and internet provider, it may be necessary for you to add This e-mail address is being protected from spam bots, you need JavaScript enabled to view it  to your list of safe contacts in your spam filters. Otherwise, you may not receive our newsletters. Our newsletters notify our members in priority of our commentaries on current events and other topics of interest. If you miss a newsletter, it will eventually be filed on the site at a later date under Information on the home page.

The indexing paradox

We recently came across a wonderful article by an american finance professor, David Eagle of Eastern Washington University , who examined in 2001 a subject dear to our heart: why otherwise sensible individuals actively manage their investments in order to try to beat the market, directly or using a third part asset manager.

As an independent investor, we invite you to read the full article, The Rationality of Index-Investing vs. The Sport of Investing, document doc.896. For the purposes of this commentary, we will limit ourselves to two extracts (p.6) from his article:

Just as an athlete may identify his/her worth based on his/her performance in his/her sport, so might an active investor’s identity being tied to his/her performance in the stock market. For such investors, index investing would be too boring, it would not be a game. To them, actively investing in the stock market is a game.

Ignorant investors go to full service brokers or financial planners for financial advice about investing their money. Since these brokers or financial planners earn more commissions on active investment options than indexing investing options they provide to their clients, or because the brokers or financial planners enjoy the game or sport of investing, they steer their clients in the direction of active investing instead of indexing. We in the finance profession must realize how much of our financial market place is determined by the marketing of financial services, which goes against market efficiency.

We all need to be reminded why index investing is the way to go, as well as why, in moments of extreme fatigue, we sometimes fall prey to the active management temptation.

M. Eagle also wrote in the same year a related article The Indexing Paradox doc.897 which is the inspiration for the title to this commentary. You should also find it interesting.

Enjoy the article(s).

Last Updated ( Friday, 21 March 2008 )
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