How do Index Funds Fare During Volatile and Bear Markets?
The main reason identified by survey investors for why they would not purchase index funds was higher market volatility. This could perhaps be a result of the misconception that index funds have greater standard deviations than actively managed funds and therefore carry higher risk. In his latest book, What Wall Street Doesn’t Want You To Know, Larry Swedroe thoroughly debunks this market myth. According to Swedroe, actively managed funds do have lower volatility because they tend to carry significant cash positions due to their market timing and stock selection strategies, while index funds are always fully invested in equities. Although Swedroe doesn’t suggest ignoring volatility, he says it’s not something an investor can spend. “The fully invested position of index funds is one of the main reasons index funds outperform actively managed ones,” says Swedroe. Of course, lower management fees and turnover combined with increased tax efficiency are also significant factors. There is al
