Why Indexing?
A large body of research from finance researchers at the University of Chicago, Dartmouth and other noted academic institutions strongly supports the position that there is very little, and quite possibly, negative value-added by the process of active investment management -- that is, by trying to pick 'good' stocks and avoid 'bad' stocks, or by trying to 'time the market.'
Additional research - some of it even produced by Wall Street firms themselves - indicates that, going forward, top performing mutual funds may be more likely to under-perform rather than out-perform the market. One study by investment firm Smith Barney covering 72 equity mutual fund managers with at least a ten-year track record concluded, 'The investment returns of the top 20% of managers tended to plunge precipitously while the returns of the bottom 20% tended to rise dramatically.[1] A similar study by Christopher Blake, associate professor of finance at Fordham University's Graduate School of Business, found that for the five-year period ending December 31st, 1997, funds that were ranked as 'five-star funds' by Morningstar at the beginning of the tracking period underperformed the S&P 500 by almost 4% per year going forward[2].
All of this research, and much more, points to the conclusion that active management doesn't necessarily only not add value, it may very well subtract value from the investment process.