Passive Investing, Like Buying Used Cars, Is a Wise Strategy

More on Passive Investing

By Rick Kahler MS CFP®


Need a car? Buy used. It’s what I always do. My sweet spot is a low-mileage vehicle two or three years old, which I routinely can find for 25% to 35% less than the original cost. I recommend this strategy to my clients, staff, and friends.

If everyone followed this advice, you’d think the approach would eventually fail dismally. After all, someone has to buy new cars. No worries, though; there are millions of people who will continue to buy new cars. Financial planners have recommended this strategy for decades, and nothing has changed in the supply of great deals on low-mileage cars.

The same applies to investors who invest “passively” in index mutual funds. Passive investors embrace a philosophy that extremely few investors can beat the average return of the stock market. Research by Dalbar, Inc. shows that over a 20-year-period, 97% of fund managers who tried to beat the market actually ended up doing worse than the market average. They suggest that, instead of paying a manager to try and beat the market, you pocket that money yourself and beat them by investing in low cost index mutual funds that simply earn average market returns.

As you might guess, those pushing the high-fee mutual funds that are actively trying to beat the market returns are the big Wall Street firms that need your money to keep their companies thriving. Not surprisingly, these firms regularly attempt to dissuade investors from passive investing.


active mamt


An article at by Larry Swedroe, the director of research for The BAM Alliance, lists a few of these attempts. Representatives for two large brokerage firms call passive investing “worse than Marxism” and those that do it “parasites.” Another, however, gives a more reasoned warning that is worth exploring. Tim O’Neill, global co-head of Goldman Sach’s investment management division, says “if passive investing gets too big, the market won’t function.”

Up to a point, this idea has some validity. Swedroe says, “Active managers play an important societal role. Specifically, their actions determine security prices, which in turn determine how capital is allocated. And it is the competition for information that keeps markets highly efficient, both in terms of information and capital allocation.”

Passive investors get a free ride at the expense of active investors. As Swedroe notes, they receive all the benefits from the role that active managers play without having to pay their costs. Passive investors need active investors to continue to believe they can beat the markets, just as used car buyers need new car buyers to supply them with used cars.

Just how likely is it that all the people who invest with active investors will figure out that paying active managers is not in their best interests and will shift to passive investing? About the same chance everyone will stop buying new cars.

Consider this. A study by Vanguard, one of the largest passive fund managers, found that $10 trillion, or 20% of the global market equity, is invested in index funds. More importantly, this 20% accounted for only 5% of all the trading. It’s the trading that drives market prices and makes markets efficient and liquid. Swedroe says “we are nowhere near” the chance that passive investing will become so dominant that the efficiency of the markets would be threatened.

Just as there is no immediate threat of the used car supply drying up because no one is buying new cars, there is also little chance that the majority of investors will give up the delusional dream of beating the market. That means wise used-car buyers and wise passive investors can keep on following their wise wealth-building strategies.



Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

Book Marcinko:

Subscribe: MEDICAL EXECUTIVE POST for curated news, essays, opinions and analysis from the public health, economics, finance, marketing, IT, business and policy management ecosystem.


“Insurance & Risk Management Strategies for Doctors”

“Fiduciary Financial Planning for Physicians”

“Business of Medical Practice 2.0”


“Financial Management Strategies for Hospitals”

“Operational Strategies for Clinics and Hospitals”


Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


3 Responses

  1. Active V. Passive Investing

    Warren Buffett recently acknowledges how hard it now is for active stockpickers to beat the market, today

    For example, $1 invested in Berkshire Hathaway 10 years ago is worth about $2.40, today; the same dollar in an S&P 500 tracker fund is worth $3.20.

    Dr. David E. Marcinko MBA


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: