Section 2: Portfolio construction

This module aims to explain the concept of index investing and its rising popularity. It will enable the reader to understand the benefits of index investing, such as lower costs, diversification and transparency in comparison to actively managed funds. The reader will explore the theoretical underpinnings of index investing’s success, such as the zero-sum game theory and the impact of costs on net returns. The module will allow the reader to understand the scarcity of persistent outperformance among active managers and importance of long-term timeframes for evaluating investment strategies. Additionally, it will analyse the impact of costs on the performance of active management versus index investing.

Upon completion of this module, the reader will understand the concept of index investing and its popularity due to lower costs, diversification benefits and transparency. They will be familiar with the zero-sum game theory and its implications for active management, supporting the case for passive strategies like index investing. The reader will understand the influence of costs on investment performance and how low-cost index funds offer market exposure at minimal expenses. Furthermore, the reader will have knowledge of how low-cost indexing addresses the challenges of active management by minimising expenses and providing broad market exposure, diversification and a long-term investment approach.