The history of index investing

What if the best investment strategy wasn't about picking winners, but simply following the market?

For decades, investors believed that the only way to succeed in the stock market was to identify the best-performing stocks or rely on expert fund managers. But one revolutionary idea changed everything - index investing. By tracking the market instead of trying to beat it, index investing made wealth creation simpler, more accessible, and cost-effective.

Let's explore how this game-changing investment approach came to be, the key milestones that shaped it, and the visionary who brought it to life.

The early days - Before index investing

Before index funds, investing was dominated by active stock picking. The belief was that skilled fund managers could consistently outperform the market through research, analysis, and stock selection. This approach, however, came with high fees, frequent trading, and no guarantee of success.

In the 1950s and 60s, financial researchers began questioning this assumption. Studies showed that most actively managed funds failed to outperform the overall market in the long run, especially after accounting for fees. This led to the idea that instead of trying to beat the market, investors could simply match its performance.

The birth of index investing - John Bogle's vision

The turning point came in 1976, when John Bogle, the founder of Vanguard, launched the world's first index fund, the Vanguard 500 Fund, which tracked the S&P 500.

Bogle's idea was simple yet radical: instead of picking stocks, his fund would buy all the stocks in the S&P 500 in the same proportion as the index. This meant lower costs, less trading, and performance that mirrored the broader market.

At the time, Wall Street mocked the idea, calling it "Bogle's Folly" because it didn't involve active management. But Bogle was convinced that investors would benefit from low-cost, passive investing, and time proved him right.

Key milestones in the growth of index investing

1980s-1990s: The rise of index funds

• Investors began to realise that index funds consistently outperformed most actively managed funds over time.
  
• More index funds were launched, covering different stock market indices.

2000s: The emergence of Exchange-Traded Funds (ETFs)

• ETFs, which allowed investors to trade index funds like stocks, became a popular alternative to traditional mutual funds.
  
• ETFs made index investing even more accessible, flexible, and cost-efficient.

2010s to today: The era of passive investing

• Trillions of dollars have flowed into index funds, making them a dominant force in global markets.
  
• Warren Buffett, one of the world's greatest investors, publicly endorsed index funds, advising everyday investors to use them for long-term wealth creation.
  
• Buffet wrote in his 1993 letter to Berkshire Hathaway shareholders, "By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."
  
• Today, index funds are at the core of investment portfolios worldwide.
  
• According to data provider LSEG Lipper, at the end of 2023, global passive equity funds accounted for more than $15 trillion in assets under management, while active funds managed were $14.3 trillion!

How index investing changed the investment world

The impact of index investing has been profound:

• Democratising investing: Index funds made investing simple and accessible for everyone, from beginners to seasoned investors.
  
• Lower costs, higher returns: Passive investing eliminated the high fees of active management, allowing investors to keep more of their gains.
  
• Market stability: As more money flows into index funds, they play a crucial role in market stability and long-term wealth generation.

Conclusion

Index investing has transformed the way people grow their wealth. What started as "Bogle's Folly" is now the foundation of modern investing, proving that low-cost, market-tracking funds are one of the best ways to invest.

If the world's greatest investors trust index funds, shouldn't every investor consider them?

An investor education and awareness initiative of Nippon India Mutual Fund.

Helpful Information for Mutual Fund Investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in For more info on KYC, change in various details and redressal of complaints, visit mf.nipponindiaim.com/InvestorEducation/what-to-know-when-investing

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

Also read:
How index funds track the market
What are ETFs?

This article was originally published on March 10, 2025.