Episode 347 - The Case for Index Funds
03/06/25 • 76 min
1 Listener
Are index funds the best investment strategy for most investors? In this episode of Rational Reminder, Benjamin Felix, Dan Bortolotti, and Mark McGrath explore why low-cost index funds should be the primary investment strategy for most people. They explain how index funds evolved from a niche concept to a widely accepted strategy and outline their six key benefits. Learn about the fees associated with index funds, why index funds outperform most actively managed funds, and how to avoid the risks of picking individual stocks. They also explore academic research on long-term mutual fund performance, the persistence (or lack thereof) in active management, and the dangers of alternative indexing schemes. Discover how behaviour impacts investment decisions and why a globally diversified portfolio is crucial. Finally, in the aftershow, Ben shares an update regarding his health and listener feedback from the Rational Reminder community. Join the conversation and uncover why index funds are the best investment strategy and how to leverage them effectively to maximize your portfolio for long-term gains. Tune in now!
Key Points From This Episode:
(0:01:58) Outline of today's topic and why index funds should be everyone's main investment strategy.
(0:05:10) Index fund fundamentals, market cap weighting, and why not all ETFs are index funds.
(0:10:03) Learn about the transition of index funds into mainstream finance and their low-fee advantages.
(0:13:30) Linking fees to index performance and why lower fees gives them an advantage over managed funds.
(0:19:50) The general awareness about index funds and what impact the lack of diversification has on actively managed funds.
(0:26:35) Explore critical research comparing the returns on investment between index funds and actively managed funds.
(0:33:32) Unpack why the size of the active management industry matters and common misconceptions surrounding the long-term returns of mutual funds.
(0:42:26) Discover why some fund managers do well and how sector-specific performance influences stock returns.
(0:48:28) Unpack why average returns are better than beating the market and what makes index funds tax efficient.
(0:51:08) Find out what makes index funds easy to use and how this results in higher returns in the long term.
(0:55:25) How index funds are consistent with foundational finance theory and why thematic ETFs and sector-specific index funds should be avoided.
(1:05:40) The aftershow: Ben shares a personal health update, Rational Reminder news, and a request for listener AMA questions.
Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP
Dan Bortolotti — https://pwlcapital.com/our-team/
Dan Bortolotti on LinkedIn — https://www.linkedin.com/in/dan-bortolotti-8a482310/
Canadian Couch Potato Blog — https://canadiancouchpotato.com/
Canadian Couch Potato Podcast — https://canadiancouchpotato.com/podcast/
Episode 54: Dr. David Blitzer —
Are index funds the best investment strategy for most investors? In this episode of Rational Reminder, Benjamin Felix, Dan Bortolotti, and Mark McGrath explore why low-cost index funds should be the primary investment strategy for most people. They explain how index funds evolved from a niche concept to a widely accepted strategy and outline their six key benefits. Learn about the fees associated with index funds, why index funds outperform most actively managed funds, and how to avoid the risks of picking individual stocks. They also explore academic research on long-term mutual fund performance, the persistence (or lack thereof) in active management, and the dangers of alternative indexing schemes. Discover how behaviour impacts investment decisions and why a globally diversified portfolio is crucial. Finally, in the aftershow, Ben shares an update regarding his health and listener feedback from the Rational Reminder community. Join the conversation and uncover why index funds are the best investment strategy and how to leverage them effectively to maximize your portfolio for long-term gains. Tune in now!
Key Points From This Episode:
(0:01:58) Outline of today's topic and why index funds should be everyone's main investment strategy.
(0:05:10) Index fund fundamentals, market cap weighting, and why not all ETFs are index funds.
(0:10:03) Learn about the transition of index funds into mainstream finance and their low-fee advantages.
(0:13:30) Linking fees to index performance and why lower fees gives them an advantage over managed funds.
(0:19:50) The general awareness about index funds and what impact the lack of diversification has on actively managed funds.
(0:26:35) Explore critical research comparing the returns on investment between index funds and actively managed funds.
(0:33:32) Unpack why the size of the active management industry matters and common misconceptions surrounding the long-term returns of mutual funds.
(0:42:26) Discover why some fund managers do well and how sector-specific performance influences stock returns.
(0:48:28) Unpack why average returns are better than beating the market and what makes index funds tax efficient.
(0:51:08) Find out what makes index funds easy to use and how this results in higher returns in the long term.
(0:55:25) How index funds are consistent with foundational finance theory and why thematic ETFs and sector-specific index funds should be avoided.
(1:05:40) The aftershow: Ben shares a personal health update, Rational Reminder news, and a request for listener AMA questions.
Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP
Dan Bortolotti — https://pwlcapital.com/our-team/
Dan Bortolotti on LinkedIn — https://www.linkedin.com/in/dan-bortolotti-8a482310/
Canadian Couch Potato Blog — https://canadiancouchpotato.com/
Canadian Couch Potato Podcast — https://canadiancouchpotato.com/podcast/
Episode 54: Dr. David Blitzer —
Previous Episode
Episode 346 - Hendrik Bessembinder: Why It's So Hard to Beat the Market
Did you know that just a handful of stocks drive nearly all of the stock market’s long-term gains? In this episode, we sit down with Hendrik Bessembinder to discuss his groundbreaking research on why most stocks fail to outperform Treasury bills and how a small fraction of stocks generate the most long-term market returns. Hendrik is a Professor in the Department of Finance at Arizona State University whose research focuses on market design, trading, and long-term investment performance across stock, foreign exchange, fixed income, futures, and energy markets. In addition to his academic contributions, Professor Bessembinder has over 25 years of consulting experience, advising major firms, financial markets, and government agencies. In our conversation, we delve into the findings of his research and find out how a small fraction of stocks generate the majority of long-term returns. We explore why traditional investment strategies often overlook the impact of skewness, the impacts of broad diversification and passive investing, and why active fund managers struggle to beat the market. Discover why chasing past returns can lead to costly mistakes, his latest research on 'sustainable returns', what type of industries have the highest stock returns, common investing mistakes, and more. Join us to uncover the surprising realities of stock market returns and how you can build a portfolio that stands the test of time with Professor Hendrik Bessembinder.
Key Points From This Episode:
(0:03:54) Explore Hendrik’s research on long-term stock returns and how most returns come from a small group of stocks.
(0:08:30) Learn how company size interacts with the skewness in stock returns and what it means for individual investors.
(0:11:39) Considering fundamentals in stock returns and the implications of skewness for measuring portfolio performance.
(0:15:42) Unpack how he used bootstrap simulations in his paper and the performance of stock returns versus Treasury bills.
(0:19:01) Find out the proportion of US firms responsible for dollar wealth creation and why diversification is essential for long-term stock returns.
(0:25:23) Navigating volatility in the market and why it is difficult to identify skilled managers in time to leverage the market.
(0:28:00) Compare the performance of US stocks versus global stocks and what is driving their performance.
(0:32:04) What the findings of his research means for financial planners and individual investors.
(0:35:35) Uncover which US firms generated the highest returns and what type of industries these companies are in.
(0:42:07) Hear about the long-term performance of US mutual funds and how investor behaviour contributes to it.
(0:49:54) How passive investing and index funds have reduced the contributions of actively managed mutual funds and the lessons for investors.
(0:55:48) Discover Professor Bessembinder's broader research interests and his definition of success.
Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP
Professor Hendrik Bessembinder — https://search.asu.edu/profile/2717225
Arizona State University —
Next Episode
Episode 348 - Andrew Barclay (StatCan): Measuring Inflation
Is the government manipulating inflation data? Why do so many people feel like their personal costs are rising faster than official inflation numbers suggest? In this episode of the Rational Reminder Podcast, we dive deep into one of the most debated and misunderstood economic topics: inflation. Today, we are joined by Andrew Barclay, an economist and senior analyst in the Consumer Price Division at Statistics Canada, to discuss everything you need to know about inflation and the Consumer Price Index (CPI). Statistics Canada is Canada’s national statistical agency dedicated to producing accurate, relevant, and timely data to help Canadians better understand their country. In our conversation, we unpack how inflation and the CPI are calculated and why it is so important. We explore the controversy around CPI calculations and the influence of inflation on government benefits, tax brackets, and the overall economy. Andrew also addresses scepticism and conspiracy theories about government inflation reporting, uncovers drivers of the perception gap, and explains how Statistics Canada ensures the accuracy and integrity of its data. Join us to hear the real story behind CPI and inflation with Andrew Barclay!
Key Points From This Episode:
(0:00:00) Background about Andrew and what inspired today's topic.
(0:05:33) Find out why measuring inflation is important and how the CPI is calculated.
(0:10:08) What goes into the CPI basket and how frequently the contents are updated.
(0:12:42) How consumer choices impact inflation and how 'shrinkflation' is accounted for.
(0:15:43) Learn how quality adjustments are accounted for in the CPI and why they matter.
(0:19:01) Scepticism surrounding quality adjustments and how the CPI adapts to crises.
(0:25:21) The role of grocery price tracking and why Canada uses a single CPI measure.
(0:28:08) Explore the idea of personal inflation and why it is usually different to the CPI.
(0:31:10) The difference between home prices and housing costs and how they are calculated.
(0:35:41) Hear how Statistics Canada's approach for housing compares to other methodologies.
(0:41:15) Perceived inflation versus actual inflation and drivers of the inflation perception gap.
(0:51:58) Statistics Canada's method of dealing with the perception gap and ensuring quality.
(0:55:51) Uncover the most criticized indexes and how Statistics Canada includes feedback.
(1:01:52) Andrew's message for those who do not trust the CPI and his definition of success.
Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Mark McGrath on LinkedIn — https://www.linkedin.com/in/markmcgrathcfp/ Mark McGrath on X — https://x.com/MarkMcGrathCFP
Andrew Barclay on LinkedIn — https://www.linkedin.com/in/andrew-barclay-a38b6035/
Statistics Canada — https://www.statcan.gc.ca/
Canadian System of National Accounts | 'Catalogue of products' — https://publications.gc.ca/Collection/Statcan/13F0029X/13F0029XIE2000001.pdf
Bank of Canada — https://www.bankofcanada.ca/
Canadian Real Estate Associatio...
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