The article argues that index investing is not “investing without thinking” and, against the backdrop of the evolving design philosophy behind the Nikkei 225, All Country funds and smart beta, clarifies the roles of active and passive investing in individual investors’ wealth building.
This article reviews the long-running debate between active and passive investing. It argues that using low-cost, broadly diversified index funds as the core of an individual’s long-term wealth-building strategy is rational, while making clear that this is not intended to reject active investing. It asks whether individual investors themselves should assume the role of active investors, which are essential for markets to function efficiently.
The article states that the market’s price discovery function is supported by diverse market participants who analyse companies, gather information and trade by taking on risk, and recognises that passive investing depends on the results of these active market activities. It examines the need for individual investors to participate in price discovery and how their appropriate role should be defined.