Index investing does have its merits, and it is becoming hard for managers to beat indices, particularly in the large cap space, but there are times when index returns lag active funds’ returns, they don’t outperform every single period. For large cap, it is almost true, except for intermediate terms. And when they fall, they will fall they will be in a free fall, as there is no intervention, there is no damage control.
And, we have equal weighted indices too, which have their own advantages. One can choose these so as to not tie the returns to a handful of stocks. Rebalancing is also done relatively late.
And by active investors, if you mean direct equity investors, there are all kinds of investors. Some may not beat the indices, some can beat but the effort is not worth the alpha, and some will beat consistently as individual stocks possess the quality of becoming multibaggers. And retail participants have started to build their own systems and models, these while come with bigger drawdowns also have the potential to deliver returns that are beyond the scope of indices.
Index investing does suit people who value their time more than the return, who have time on their side, who can sit through underperformance without comparing their return with active funds, who believe in the growth of the overall market, not just some pockets etc.
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