Why The Psychology of Money Author Morgan Housel Prefers Passive Index Funds Over Active Mutual Funds
Bestselling author Morgan Housel, known for The Psychology of Money, follows a simple investment strategy, favoring index funds over active mutual funds. However, this preference is not based on skepticism about market outperformance but rather on the simplicity and longevity of investing in passive funds.
Why Morgan Housel Chooses Index Funds
Speaking at Moneycontrol’s Global Wealth Summit on March 7, 2025, Housel revealed that he has invested primarily in index funds.
- His choice is not driven by a negative view of active funds but rather by his preference for keeping investments simple.
- He acknowledges that smart investors have outperformed the market in the past, can do so now, and will likely continue to do so in the future.
Focus on Long-Term Strength and Endurance
Housel emphasized that his goal is to maximize endurance, strength, and longevity—factors that are within a person’s control.
- Rather than obsessing over short-term gains, he believes that remaining an average investor over the next 30, 40, or even 50 years will still lead to significant wealth accumulation.
- His perspective aligns with his book’s core message, which teaches readers about wealth, greed, and happiness and has been a global bestseller since its 2020 publication.
What Are Index Funds?
Index funds are a type of mutual fund designed to track and replicate the returns of a specific stock market index, such as the Nifty 50 or the Nifty Midcap Index.
- These funds are ideal for risk-averse investors looking for passive exposure to the market.
- Compared to actively managed funds, index funds cost less but still carry market risks and volatility.
- Instead of trying to beat the market, index funds mirror the performance of their underlying index over time.
Are Index Funds Suitable for Everyone?
According to the Association of Mutual Funds in India (AMFI), index funds can be a good starting point for first-time investors.
- They provide broad market exposure with lower costs but come with limited flexibility compared to actively managed funds.
- One risk is tracking error, where the fund manager fails to perfectly replicate the index’s performance.
Despite these limitations, Housel’s investment philosophy highlights the power of long-term investing, reinforcing the idea that simplicity often leads to success in wealth-building.
