INDEX FUNDS

Investors should stop trying to beat the market and switch to passive index funds, according to Hebner’s incisive primer.

The author, CEO of Index Fund Advisors, Inc., and founder of the ifa.com investment website, takes aim at so-called active investors who believe that, by adroitly buying and selling stocks, or parking their money with a mutual fund that’s actively managed by a stock-picking guru, they can get higher-than-market returns. Hebner argues that actively managed funds deliver worse-than-market returns, especially after skimming off high fees; he asserts that individual investors cannot reliably decide which stocks will perform well in the future or predict when the market will turn up or down, and that the top fund managers over any given period are very likely to deliver lousy returns over the next period. The solution, he concludes, is to invest in passive index funds of the kind that IFA recommends, which try to mirror the market by using simple, transparent rules to decide when to buy or sell a security. The author backs his arguments with a mountain of research by Nobel Prize–winning economists and illustrates his points with reams of colorful tables and charts that lay out in gory, unarguable detail just how pointless the project of stock-picking is (one graph shows that newly fired fund managers, on average, get better returns at their next jobs than do the managers hired to replace them). Hebner makes complex issues of probability and risk lucid and intuitive, conveying his analysis in prose that’s street-smart (he likens active investors to gamblers addicted to trading and in need of a 12-step regimen) and deliciously tart: “Although a few managers will occasionally appear to have reliably delivered [above-benchmark returns]…the number of such managers is no higher than what we would have if all of them were monkeys throwing darts at the Wall Street Journal stock listings.” Color reproductions of Ragimov’s richly textured, finance-themed oil paintings make this the artiest of money books as well.

A no-nonsense guide to disciplined investing, full of deep insights framed in compelling ways.