Before the Fundamental Index™, investors had two choices of strategy—
Active or Passive
Each had its own argument to make.
Investors who believed markets were largely efficient, or doubted their ability to select skillful managers, leaned toward low-cost market capitalization–weighted index funds.
Investors who believed markets were inefficient and had confidence in their manager selection process were more inclined toward active management.
But both were “false choices.”
Market cap–weighted equity index funds automatically increase their exposure to stocks whose prices appreciate and reduce their exposure to stocks whose prices depreciate. As a result, they tend to overweight overvalued stocks and underweight undervalued stocks.
Active management, unlike a rules-based objective strategy, is not transparent, comes with high fees, and tends to underperform its benchmark over long time periods.