A Winner: Passive Investing in 2014


With the end of 2014, year-end investment returns are coming in, and two noteworthy results are these:

  • Passive investing, especially with Vanguard Group, continues to gain momentum
  • Passive investing, according to preliminary results, produced higher returns than many competing styles of investing.

Readers should remember that passive investing involves buying a broadly diversified collection of stocks or other investments designed to mimic an entire market. Most stock funds are not passive. Instead, their managers try to achieve good investment returns by studying the economy and business trends, then predicting which sectors or stocks they think will offer the best returns in the months or years ahead.

Research shows that short-term stock and bond prices behave randomly, or near randomly. Therefore people who spend money to predict which stocks or bonds will perform best in the upcoming months or years are largely wasting that money. Those investors will do as well or better by buying a fund designed to mimic the entire stock or bond market. They are betting, then, only on long-term returns, which are much less random.

The Vanguard Group is a leader in passive investing, though several other investment firms also offer passive funds.


According to a Wall Street Journal article on January 4, investors are voting “no confidence” in stock pickers and are flocking to Vanguard, which experienced inflows of $216 billion into its U.S funds (Vanguard later adjusted this estimate to $214.5 billion). The next most successful fund company was Dimensional Fund Advisors with $26.2 billion (through November).

Dimensional Fund Advisors is available to individual investors through a select group of independent fee-based advisors. Dimensional’s strategy involves working closely with leading financial academics to translate new research into investment strategies. It has been a successful firm, and from what reports I’ve seen, it’s clients are well served. The only problem for many investors is that access is limited: the select financial advisors are often far away, and they often serve only clients who have already accumulated significant amounts of money.

Vanguard is directly available to individual investors through U.S. mail, the Internet and telephone. Also, any fee-based financial advisor can, in principle, help clients develop passive portfolios.


Then on January 5, the WSJ published another article saying that U.S stock funds rose 7.6% in 2014. That is the total return of U.S. diversified stock funds (excluding sector and regional and country funds).

Now compare this: Vanguard’s Total Stock Market Index Fund, which is a passively managed fund, posted a total return of 12.56% in 2014, according to Vanguard’s website. That is almost 5 percentage points above the average diversified fund, or 65% greater.

These figures may be revised in the weeks ahead, but it now appears that 2014 was another among many years in which passive investing succeeded.

There is more to successful investing than one stock mutual fund. Nonetheless, “small investors” (up to, say, $250,000) can earn very competitive returns by investing in a small group of good stock and bond index funds that mimic U.S. markets, international markets, perhaps commercial real estate, and maybe funds aimed at stocks paying high dividends.

Retirees who practice passive investing benefit from low costs, above average performance and very small investments of personal time. That leaves them with more money and time for travel or whatever else captures their fancy.

Photography captures me, and here’s a photo I took recently in the fog, which we’ve had plenty of in the last several weeks. Maybe there’s a message in the photo for investors—park money close to the light of well established research.