Apr 21, 2022
Investing

Videos: A magician, an honest investment ad and a Wall Street story make the case (in entertaining fashion) for index funds

Engaging videos using magic, musicals and an ad make the case for a specific investing approach. 

Thanks to Paul Geddes, a past guest on the NGPF Podcast, for these creative videos that make the case for index fund investing. 

Quick primer on the difference between active and passive (or index) investing, courtesy of Fool.com

A major debate has divided the investment world for years: active versus passive investing. Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500 or the Russell 2000. Passive investments are funds intended to match, not beat, the performance of an index. While there are advantages and disadvantages to both strategies, investors are starting to shift dollars away from active mutual funds to passive mutual funds and passive exchange-traded funds (ETFs).

Why? As a group, actively managed funds, after fees have been taken into account, tend to underperform their passive peers.

For those teaching the Semester course, these videos would work well to reinforce concepts in lessons 7.5 (Deep Dive into Funds) or 7.6 (What's Your Investment Strategy?)

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In Magic Tricks and Active Investing, a magician explains with some sleight of hand how our brains process illusions in both magic shows and active investing.

Questions:

  • Why do we think that we can predict future outcomes? 
  • What does the investment management business want you to focus on? Why? 
  • What happens with our brains when we see investments that have the promise of high returns?  

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In The Honest Investment Ad You’ll Never See...What if investment firms advertising active management were required to include full disclosure of the historically low success rate of active versus indexing? If the same rules from pharmaceutical advertising applied to active stock pickers, here's what a fully honest ad might sound like.

Questions: 

  • In watching the first minute of the ad, what does the investment firm emphasize to convince people to invest with them? 
  • Which of the warnings about active management did you find most convincing? most surprising? 
  • Why do you think financial service firms are not required to make the disclosures you heard in this ad? 

 

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In Wall Street Story...What if the debate between active and indexed stock investing were a Broadway musical about competing gangs, like West Side Story? Whether sung, read, or spoken, the data overwhelmingly support indexing for long holding periods.

Questions: 

  • What's the strongest data in favor of index investing? 
  • What argument do the Actives make? Do you find it convincing? 
  • Given the low probability of an Active strategy outperforming an index fund, why do you think that 50% of mutual fund assets are still in Active investment strategies? 

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 Find many more videos, including EdPuzzles in the NGPF Video Library

 

 

 

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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