Regular passive index investing is a strategy that "buys high and sells low". Surprised? Think about it. A regular index is created by weighting the stocks according to their market values. This method of weighting passively creates an index that rebalances towards stocks that have recently increased their market value. Thus, the strategy is highly inappropriate.
Currently, there have been developments for indexes that are weighted according to the underlying stocks' fundamentals (Rafi Index). The basic idea behind these fundamental indices is that companies should be invested according to their real world size, not their market value. Real world size can be measured by earnings, dividends, revenues or even employee numbers. These indices have been back-tested to provide superior returns to regular indices. This methodology is able to do so as it is tilted towards value stocks and gives the holder a disciplined tilt towards contra trading against the market sentiments.
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