No. It beats active traders most of the time. Many active traders vastly outperform it -- by over 2X before compounding -- over 20+ year periods, and not by luck. julian robertson, warren buffet, and ~100 of their proteges, as examples. Basically anytime a new understanding of markets which introduces the potential for profit is developed, there's a period of at least a decade or two when small funds can generate extremely outsized returns before it's arbitraged away. Just like in business.
Your belief is the basic reddit tier intelligent belief: Bogglehead, Vanguard, blahblah. I used to believe what you believed too.
Please reread your comment and realize that it also disproves the ability to make money in business (ie non financial markets) consistently other than thru luck and that the efficient market theory is a hypothetical never-reached endstate.
No it doesn’t. The appeal of index funds is that they are perfectly average. Sure, beating the index every year is a challenge, but who cares about that? The game is making money turn into more money, not trying to get 1% more than the S&P for everyone except fund managers. Beating the index by a massive amount once pays for all the times you underperform it.
Not to mention: hedge funds have beat the market very consistently for decades (before fees), starting a new job is often a higher roi, real estate has a higher sharpe ratio over the last 100 years, private equity has a higher return before fees for decades, venture capital has beat the market consistently, starting a business frequently has a higher or even much higher roi, all these especially in absolute terms (nobody rich before 50 got that way from index fund returns).
To say “the index beats the active traders”, or that active traders lose everytime, or that it’s impossible to beat the market is just 1. Not relevant because it’s a vanity metric on its face, 2. Not strictly correct. It’s just said by people who want to convince themselves that the dominant strategy in investing also happens to be the easiest one for them. Index funds are about average returns - and thats ok! That’s probably best for any investor not looking to put in serious time or effort, but it’s certainly not the best strategy for maximizing returns (in fact, there are literally infinite strategies that have consistently beat the market on average for the entire duration of the exchange that don’t have foresight or overfit). The index itself is arbitrary: rank order the public equities by revenue, then select the top 500 and weight them by market cap. For the total market: you still chop off the companies that aren’t public arbitrarily, you still weight by market cap (why not volume? Why not weighted trade volume which correlated better with prices?).
As a parting note on this rant: the efficient market hypothesis is about determining fair value is an open system with minimal barriers and motivated rational players playing by the same rules with instantaneous info propagation. Do we all play by the same rules? Do we all have the same barriers? Are we all rational players? Is info propagated instantly? Are these values true enough? The market is efficient - except when it isn’t. Plenty of people succeed in business when the efficient market should have meant there was no opportunity for them, plenty get rich on trades when the efficient market says that trade shouldn’t exist. It’s paradoxical that the market can be perfectly efficient and those could be true, because even tiny risk-free profits should be consistently and equally arbitraged out of existence immediately. That just doesn’t describe our world.
>real estate has a higher sharpe ratio over the last 100 years
Does it really? Every home price index looks something like this: https://i.imgur.com/7fluMBz.png (If you can find a better one, please post it. This was just the first google result)
If you wanted to plot stock market returns on the same chart, you'd have to make the Y axis log scale. Meanwhile max drawdown isn't all that much higher for the stock market.
where researchers tracked several asset returns since the 19th century across several western countries. While real estate and equities have similar absolute returns (7%) real estate returns are 4x less volatile, resulting in a sharpe ratio for real estate 5x higher than equities in a country like France, closer to 2x higher in the US, and just slightly higher in Australia - the rest of the measured developed countries fall in that range. In no country measured in the developed world are real estate sharpe ratios lower than equities on average annually over the last ~150yrs.
Recommended reading: More Money Than God.