Ludwig: OK. But why don’t you formulate a nuanced critique of active investing? It may be an ego-driven decision to invest in a terribly expensive hedge fund, but aren’t active investors playing an important role of price discovery?

Swedroe: Price discovery is a social good, and it’s important to recognize that. And you need active investors to do that.

I’m sure you know the term “free rider.” Indexers get a free ride on their price discovery activities. And as long as others are willing to do it, you should say, “Thank you very much for giving me a free lunch.”

Ludwig: It seems plain that marketing hype on the part of the purveyor will always be a major variable, as will ego—as you say—on the part of wealthy investors. But on the other hand, indexing is growing. What are the upper reaches of this percentage of investors who index?

Swedroe: I don’t know, but I do believe it’s a strong trend. First of all, there are more and more people like me and Bill Bernstein and Rick Ferri and John Bogle leading the charge and spreading the word on passive investing.

No. 2: More and more investors are waking up to the fact that active investing has generally delivered very poor and inconsistent returns. And so they’re switching over. And institutional investors are moving more that way as they wake up to it. And even the law is pushing people in that way, because I think you’re going to start to see more and more lawsuits on this issue, 401(k) plans, etc., with high expenses, and a bigger push toward enforcing fiduciary responsibility.

I’m absolutely convinced that active management is a dying industry. It just doesn’t know it’s dying. I’m 100 percent convinced that the trend toward indexing will continue. It will likely continue to go slowly because human beings are human beings: They all think they’re above average. They’re all overconfident, or mostly overconfident of their ability to pick stocks and time the market and find the next active manager.

So, maybe it will take the 20 years for indexing among individuals to go from 13 percent to 25 or 30 percent. But I don’t think it’s going to be 70 or 80 in the next 15 years. But the trend isn’t going away. And this is really good news for investors.

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