Why are index funds not always the optimal strategy for investing?

Question

I heard a claim that it is always the best strategy to invest money to the index fund. Why is the mistake in that sentence? Because I don't understand why there are investment advisers if we already know the best strategy. Are there scientific publications to show that the claim does not hold in every case for someone who claims that?

Answer 1

The data here is quite clear:

For example: https://www.nerdwallet.com/article/investing/index-funds-vs-mutual-funds

History has shown that it’s extremely difficult to beat passive market returns (a.k.a. indexes) year in and year out. In fact, for the 15 years ending in December 2016, more than 90% of U.S. large-cap, mid-cap and small-cap funds helmed by managers did worse than the S&P 500, according to S&P Dow Indices data.

For most investors a few well diversified index funds are the best choice.

Because I don't understand why there are investment advisers if we already know the best strategy.

Because there is a lot of money to made. This is a multi billion dollar industry with gobs of money to spend on marketing and lobbying. For example, many 401k plans don't offer index funds. There is no reason for this other than the benefits consultants and plan managers are lobbied heavily to push managed funds.

The following approach is sufficient for most investors

1. Invest in broadly diversified index funds
2. Adjust your bond/stock ratio depending on goals (usually retirement age).
3. Once a year re-balance. i.e. make sure you don't have to much money in a single investment. In many case this is just a check with no actions needed.

Some people may have difficulties doing this themselves, so a financial advisor or a "target fund" can be helpful. You just have to be aware that you pay a hefty premium for this assistance.