Nobel Laureate Gene Fama has given a rare interview, in which he once again spells out the case for using index funds.
We all know that index funds are very much cheaper than active funds, and that they incur much lower transaction costs as well. They’re also transparent and easy to understand.
But Fama says another big advantage that indexers have over active investors is that they are far more diversified.
Diversification is your buddy
Speaking to Jane Wollman Rusoff at ThinkAdvisor, the 82-year-old finance professor at the University of Chicago Booth School of Business, says diversification is hugely important:
“Basically, you want to be diversified. Diversification is your buddy. You don’t want to be undiversified.
“By definition, if you’re into active management, you’re going to be undiversified because no active manager — even the few good managers — can pick out large numbers of underpriced assets.”
Set and forget
Asked what investors need to think about when investing their assets, he replies simply: “Hold a diversified portfolio and forget about it.”
Elsewhere in the interview, Fama gives his opinion on talk of a market bubble, Bitcoin, gender diversity in the investing industry and the changing nature of financial advice.
You can read the full interview here:
“Father of modern finance” on the the theory behind index funds
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
