Index Investing in Ireland – A topic that will be of interest to all.

As you know at Informed Decisions, we believe in helping build a secure financial future through strategies grounded in research, not speculation. Today, I’d like to share why evidence-based investing, a disciplined approach driven by decades of data, stands out as one of the most reliable ways to achieve long-term financial success and security. While the 5 benefits outlines apply to both pension and non-pension investing, they really come into their own when investing via a pension/ARF. Reason being, these structures are typically invested (and generating income for you!) for multiple decades, so the benefits keep accumulating for a looooong time!

What is Evidence-Based Investing? 

Evidence-based investing isn’t about chasing trends or trying to outguess the market. Instead, it’s grounded in decades of research and historical data, focusing on key principles like diversification, cost-efficiency, and behavioural discipline. These principles help investors avoid common pitfalls and maximise the growth potential of their portfolios. 

Here are five compelling reasons why evidence-based investing via Passive Index Funds in Ireland is a cornerstone of our strategy: 

1. Market Efficiency 

The Efficient Market Hypothesis refers to the belief that markets constantly price markets/equities/funds based on all available information. As in, the markets price (and therefore your fund value) today is actually based on all the info that is ‘out there’ about what is or will happen.

This therefore makes it exceptionally challenging for active fund managers to consistently outperform or even match market benchmarks after accounting for fees and taxes. 

• The Evidence: Studies like SPIVA (S&P Indices Versus Active) reveal that over the past 10 years, 92% of actively managed European funds underperform their benchmarks. High fees, frequent trading, and the difficulty of consistently outsmarting the market drive this underperformance. Have a look at the data here, or google ‘SPIVA Report’. Fascinating stuff.

2. Lower Costs Index Funds in Ireland = Higher Returns 

Reducing costs is a simple but powerful way to boost your investment returns. Actively managed funds often charge fees of 0.85% or higher (though we have difficulty getting access to this info here in Ireland!), while index-focused options, like those from Vanguard or BlackRock, charge as little as 0.10%. 

• The Impact: Assuming an 8% average annual return, switching from an active fund with 1% fees to an index fund with 0.1% fees can enhance your annual returns by nearly 10%. Over time, these savings compound significantly, contributing to greater wealth accumulation and brighter financial futures for us all.

Speaking of returns!

Over the past 12 months alone, a simple diversified 100% equity index funds in Ireland via Vanguard portfolio has delivered 30%.

A simple diversified 80% Equity and 20% Bond Vanguard portfolio has delivered 29%.

Simple, low-fee, passive, effective.

And it may not surprise you to hear that ‘active’ multi-asset portfolios over the same period have under-performed these approached on a like-for-like basis by between 2% and 15% in those 12 months. Scary.

And obviously it has been an incredibly good year for equities (and Bonds), so what about longer term, traversing Covid, Market declines, 2022 wash-out? An 80/20 portfolio utilised by many of us, has achieved 11% annual average returns since 2010, highlighting the power of evidence-based passive index investing.

3. Behavioural Advantage 

Emotional decision-making is one of the greatest threats to investment success. Investors often buy during market highs and sell during downturns, eroding long-term returns. Active Managers are humans too, and they are prone to the very same errors as people sitting at their laptops buying and selling their Degiro holdings.

• The Research: Dalbar studies show that the average equity investor underperformed the market by over 2% annually over 30 years due to poor timing and emotional decisions. 
• More recently, the Average Equity Investor earned 5.5% less than the S&P 500 in 2023, the 3^rd largest investor gap in the last 10 years. Behaviour
• If you really want to get more detail on the research, one can buy the full DALBAR report for $2,500 here!!!

At Informed Decisions, we help valued clients remain disciplined, stay focused on long-term goals, and avoid these common behavioural traps via index funds in Ireland.

4. The Power of Diversification 

Index Investing in Ireland embraces diversification. Spreading investments across asset classes, geographies, and factors such as size and profitability. This approach reduces risk while leveraging proven drivers of long-term returns. 

• Example: Research shows that small-cap stocks have historically outperformed broader markets over the longer term – they are deemed more volatile, and that risk premium usually pays off over the long term. While this is very time-dependent, Small Caps have under-performed in recent times). A diversified portfolio tilting toward Small Cap could offer the potential for enhanced returns over the long term without adding complexity and friction. 

Again, looking at the data from a particular fund provider, Vanguard, we see the performance of two approaches, Small Cap and Developed (Large Cap). Small Cap added a premium until recent years, where the Large Cap approach has outperformed. Again, explains the logic for long term investors buying and holding a large chunk of Developed, and a ’tilt’ to Small, potentially. But without actively switching between the two (which we now know, doesn’t work!).

5. Compounding Returns Over Time 

Albert Einstein called compound interest the “eighth wonder of the world.” Evidence-based investing harnesses this principle by minimising costs, staying invested, and allowing dividends to accumulate, enabling your portfolio to grow exponentially. 

• A Practical Perspective: A €100,000 investment compounding at 8% annually grows to approximately €466,000 in 20 years (366k gains) Reducing your return to 6% due to higher costs would result in just €320,000 (220k gains), a difference of nearly €150,000 in gross gains.

Again, an 80/20 portfolio, up 29% in the past 12 months, as today. This illustrates how staying invested can deliver impressive results without speculative behaviours and complex structures. 

How We Help 

At Informed Decisions, our commitment is to equip clients with the strategies needed to build a successful financial future. Through evidence-based investing, we help: 

• Harness the power of compounding 

• Stay diversified and cost-efficient 

• Avoid the pitfalls of speculative strategies and behaviours 

• Enjoy their money!

Whatever your preferred approach, it is always worth having a trusted partner to guide you along the way, to avoid behavioural mistakes, worry and fear. Ultimately, ensuring your portfolio remains aligned with your goals and how you want to live and love.

I hope this helps.

Paddy Delaney QFA RPA APA 

___

Disclaimer

___

The content of this site including blogs and podcasts is for information purposes only. Everybody’s financial situation is different and the content we share on our site and through podcasts may not be applicable to you. 

The articles, blogs and podcasts are not investment advice. They do not take account of your individual circumstances, including your knowledge and experience and attitude to risk. Informed Decisions can’t be held responsible for the consequences if you pursue a course of action based on the information we share