What if everyone became an index investor

Robin Powell Mark Hebner/ Financial adviser & author +++ RP: The evidence has been clear for decades: most active investors fail to beat the market. Yet millions of people keep trying. They trade, they speculate, they chase the next hot stock — convinced that this time will be different. Financial adviser and author Mark Hebner points to two main reasons why active strategies fail. MH: “First of all the transactional costs, and the mistakes that people make. These are the two primary reasons that people don't beat the market. They make mistakes through concentration or just mistiming, and through all these transactions, they increase their costs, which just automatically reduces their return. The costs are an automatic. The mistakes are, you know, kind of, they come and go, but the more you trade, the more mistakes you're likely to make.” RP: So higher costs and more opportunities for error. It's a toxic combination. Why, then, is active investing still so popular? Mark Hebner says it all comes down to a powerful psychological temptation. MH: “ I call it cheating risk. You actually earn money slowly by exposing your assets to risk consistently over time. And what they're saying is, no, I could hop right in here and get a ten-bagger on my stock. I don't have to worry about the risk. You know, that's their mentality. So it's a get-rich-quick, risk-cheating type of investment strategy in their mind that trips them up and confuses them into thinking that's a better investment strategy for them.” RP: Getting rich slowly just doesn't have the same appeal as the dream of a quick windfall. But if indexing is clearly the better approach, what happens when more and more people catch on? What if everyone used index funds? Would markets simply stop working? MH: “That's an age-old question for every person espousing the benefits of passive investing. OK. What if everybody becomes a passive investor? And it also deals with the function of an exchange, which is p