There are a large number of American financial advisors who are deeply committed to the idea that MPT is one of the greatest financial innovations in investing since the creation of the equity markets themselves. I refer to these Index fund advisors as MPTer’s. I will argue that while there are better solutions than indexing, it does provide a sound means of allocating capital. Unfortunately, too many American financial advisors charge their clients far too much for this solution.
- You’ll never do much worst than average (in spite of countless assertions to the contrary by your high school English professor)
- Since the market has historically gone up 2/3 of the time, you’ll make money more often then you’ll lose it (Odds better than Vegas, baby!)
- Index investing is completely rational and therefore eliminates emotional errors in investing (I actually would disagree with this on certain levels. Over short periods of time, it eliminates emotional errors but many index fund advisors make large, macro errors which I’ll cover later.)
- Keeps investing costs to a minimum (Bankrupting those good-for-nothing bums on Wall St)
- It is a tax-friendly strategy because it defers realized gains (Bankrupting those good-for-nothing bums in Washington)
While I’ll agree that you could do a lot worse than using an index investing approach, I personally believe that it has numerous disadvantages which is why I am not a proponent of index investing. In the next post in this series, I’ll cover the many disadvantages of index investing.