Basically if you are following the same publicly known strategy (buy the index), other investors can arbitrage you by buying or selling ahead of you, like before a stock becomes part of the S&P500. That means you always buy stocks dearer and always sell cheaper.
That's why confidentiality and anonymity is crucial to a functioning market.
You dodge the arbitrage of stocks getting in and out of the index but you miss the virtue on using an index, which is that the index rules are not a horrible investment strategy: buy the stocks that are on the rise, sell when stocks are on the way down.
But total markets will still have other downsides, like all the stocks become completely correlated if enough people are only making investment decisions on the total market instead of individual stocks, and prices become less meaningful.
Interesting - I've been saving money and trying to get into investing more recently, and lots of the advice I've read for someone young seems to point towards using an allocation of something like 90% stocks and 10% bonds, maybe like
- 55% Vanguard Total Market Index
- 35% Vanguard Total Market International Index
- 10% mixture of Vanguard bond domestic and international index funds
Is there a better strategy out there besides index funds that doesn't involve me getting eaten alive with active fund fees? A lot of what I read suggests that actively managed funds never consistently outperform the market index.