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So, how can ordinary investors apply the academic evidence - the lessons learned from more than a hundred years of rigorous research? How can they apply that to achieving their financial goals?

Well, this might sound dramatic, but the work of Louis Bachelier, and of Nobel Prize-winners like Samuelson, Sharpe and Fama, should make us question almost everything we thought we knew about investing; and almost everything the financial industry and the media tell us we should be doing.

Most of all, the evidence should make us extremely wary of anyone who claims that they have the knowledge to beat the market. Because markets are fundamentally efficient, consistent outperformance is almost impossible.

So, instead of paying large sums in fees to active fund managers to deliver average returns, we should invest instead in passive funds that simply track an index at a much lower cost.

Ultimately, though, it’s not about theories or intellectual arguments at all. It all boils down to simple mathematics.

Despite the mathematical superiority of passive investing and the welter of empirical evidence supporting it, the industry has constantly tried to discredit it. When Vanguard introduced its first index fund in 1976, the idea was slated.

It was Bogle who had the last laugh. Vanguard now has more assets under management than any other company in the world - including Fidelity - which, incidentally, is now the second biggest provider of index funds.

And yet, even in the United States, where passive has a bigger market share than in the UK, active remains by far the most popular way to invest.

Perhaps surprisingly, another longstanding advocate of passive investing is the most famous active investor of all. Warren Buffett once said: “When the dumb investor realises how dumb he is and buys an index fund, he becomes smarter than the smartest investors.”

More recently, Buffett gave this instruction to the trustee of his estate: “Put 10% of the cash in short-term government bonds and 90% in a very-low cost index fund. The long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”


In recent years, even the great Warren Buffett has failed to beat index funds after costs. It’s not surprising then that fund managers themselves are starting to acknowledge that this really is a losing game.
So, the fund industry won’t tell you this - it has far too much to lose by doing so - but by far most appropriate investment vehicle for the vast majority of investors is the humble index fund.
No, it’s not perfect - we’ll explain why later. And although it’s a relatively simple way to invest, requiring very little maintenance, there are still some very important decisions for index fund investors to make.

There is another, much bigger, issue that needs to be addressed. Passive, as we’ve heard, is still far less popular than active investing. But what if it continues to grow? What would happen if, eventually, most people invested passively?

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