A Random Walk Down Wall Street Ch. 6: The Honest Objections to Indexing

"He who knows only his own side of the case knows little of that." — John Stuart Mill

Investment Context

The first five chapters build the case for indexing. This one addresses the serious objections to it — not to weaken the conclusion, but because a belief never tested collapses under pressure.

If you first encounter these objections during a difficult market, you are far more likely to abandon your plan. Understanding them in advance is a precondition for holding on.

The Wall Street Translation

Objection 1: Indexes Have Become Highly Concentrated

The fact is correct. Cap-weighting means a handful of the largest companies occupy a substantial share of the index, and top-weight concentration in the S&P 500 has risen markedly in recent years. Buying a "diversified" index fund sends a great deal of your money to very few companies.

Response: the risk is real but needs correct framing. Cap-weighting reflects the market's actual composition — any departure from it, whether equal weighting or fundamental weighting, is an active judgment, and historically those alternatives have sometimes outperformed and sometimes not. The sturdier answer is adding international equities and bonds rather than abandoning cap-weighting.

Objection 2: What If Everyone Indexes?

If nobody performs price discovery, markets lose their pricing function. The concern is logically sound.

Response: it is a theoretical boundary rather than a present problem. Price discovery requires enough active capital, not a majority of it. And the issue self-corrects: if indexing genuinely broke pricing, active management's returns would rise and money would flow back. Until that threshold is reached, deciding on present reality is reasonable for an individual.

Objection 3: The Lost Decade

From 2000 to 2009 the S&P 500's total return was approximately zero or negative. A US investor who began indexing in 2000 had essentially no growth ten years later.

Response: this is the strongest objection and the most important lesson. It is true and must be built into expectations. Two additions, though: international equities and bonds performed considerably better over the same period, so a diversified portfolio did not experience that decade; and anyone contributing steadily throughout did far better than a lump-sum investor.

The correct conclusion is not "do not index" but "do not hold only one country's equity index."

Objection 4: Indexing Guarantees Mediocrity

Response: this confuses gross return with net return. Indexing guarantees the market's return minus very low costs — and Chapter 5's data shows that beats the large majority of active managers over time. Receiving "average" places you, after costs, in the upper half of the distribution.

An Honest Summary

Indexing is not a perfect solution but the most reliable one for most people after costs, taxes, and behavioural losses. It has genuine weaknesses: it will not protect you from a broad market decline, it holds overvalued assets fully during bubbles, and it demands you endure long stretches of mediocrity.

Accepting those weaknesses and still choosing it is a completely different state from choosing it without knowing them — and only the first survives pressure.

Actionable Trading Rules

1. Answer concentration risk with multi-market diversification: Do not hold only one country's equity index; adding international equities and bonds responds to Objections 1 and 3 together.
2. Accept in advance that a lost decade is possible: Build it into your expectations and withdrawal assumptions rather than assuming average historical returns will arrive.
3. Periodically check what your index actually holds: Know your core fund's top ten holdings and sector weights, so shifts in concentration never come as a surprise.

Relevance to a Retirement Portfolio

This chapter's value to retirees is making your conviction able to survive contact with markets.

The greatest risk to a retirement portfolio is not choosing the wrong fund but abandoning the plan at the worst moment. And people abandon plans largely when they meet an objection they had never considered. Understanding indexing's real weaknesses in advance — and confirming it remains the best choice on balance — is the most reliable protection against wavering in the next bear market.