Low-Cost Funds Capture Nearly All of the Market’s Gains (and Losses)

Here’s a quick snapshot that illustrates why Vanguard and other low-cost funds are taking assets from active managers. Via this Bloomberg article. The US stock market has been on a great run for nearly 9 years now, and low-cost funds have been giving investors nearly all of those gains.

People always chase past performance. The vast majority of index fund money is in US stock funds, and those have the best recent past performance. But when the US stock market eventually stumbles, those low-cost index funds will also be great at passing along all of those losses.

What will happen then? While it hasn’t been very helpful recently, I still agree with those recommending have diversified exposure into other areas like developed international stocks, emerging markets stocks, and high-quality bonds.