Buffett’s advice leads to $5.5 billion pop in this index fund

Investors are desperate to stay passive.

As the Wall Street Journal notes today, the public during this bull market are overwhelmingly favoring low-cost, index-tracking mutual funds rather than those that try to beat the market averages.

Vanguard’s passive Total Market Index (VTI), which matches the return of all U.S. stocks, is now the largest mutual fund on earth and the firm in total manages more than $3 trillion. Since the start of 2013, the public has sent $4 to stock-and-bond index products for every dollar they’ve handed to managers who promise to outperform the benchmarks.

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Warren Buffett – the richest man ever to make his fortune through investing – even told his shareholders this year that most people are better off in a Vanguard index portfolio.

This could be seen as a big, long-understood lesson finally absorbed by investors: Over time a very small minority of stock pickers manage to beat the market after fees and taxes, and it’s nearly impossible to know which ones will in advance. The ease of using index exchange-traded funds has also supported this wave to passive portfolios, which have outpaced the vast majority of active managers in this five-year bull market.

There’s a reflex response on Wall Street to this trend: If indexing is so popular with the little guy, then it must be time for stock picking to start working again.

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And in fact, it HAS become more of a so-called “stock picker’s market” in 2014 if that means a wider divergence between sectors and stocks that have risen and fallen. Trouble is, the stock pickers as a group haven’t caught the moves correctly.

Two important final notes: The advantage of indexing has everything to do with the much lower fees charged. Any strategy performed at low cost will do better than an active fund draining 1% a year away in management expenses.

And keep in mind that index funds offer zero protection from a bear market. They capture every inch of the market’s downside just as they ride the gains. You’ll just pay less for your portfolio to shrink.

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