A new film champions "passive investing." But is that method overhyped?

Whether or not you're a finance geek, the Academy Award-winning filmmaker Errol Morris’ "Tune Out the Noise" is a compelling, timely documentary.

It’s an engaging chronicle of the academic breakthroughs that transformed investing from guesswork and gut feelings into a more scientific endeavor. And it's a reminder of an era where many of the truisms we take for granted now —such as a diversified portfolio and the benefits of an index fund — weren’t always common practice.

The film, available on YouTube, explores the rise of passive investing and the people and conditions — like the computer revolution — that came to dominate the thinking behind millions of Americans’ retirement accounts.

But it also raises questions about the limits of passive investing and whether its glory days are over.

As the name implies, this investing strategy does not try too hard: It aims to replicate the performance of a market index rather than trying to outperform it through day trading or stock selection.

So instead of stock picking or betting on individual winners, passive investors buy and hold a broad, diversified mix of assets, such as index funds or exchange-traded funds. The goal is to invest in the long-term growth of the entire market, minimizing costs and avoiding the pitfalls of market timing and speculation.

“Instead of pulling your hair out and watching financial news all day long, tune out the noise," David Booth, a founder of Dimensional Fund Advisors, says in the film. The investment firm was involved in the production of the documentary.

"Instead of outguessing the market, let me make all these thousands or millions of people who are investing work for me. I’m just going to sit back and let them duke it out," Booth says.

The documentary traces the roots of the passive approach to a period of intellectual renaissance in the 1950s and 1960s, when a group of young, hungry financial economists at the University of Chicago began to challenge Wall Street’s conventional wisdom.

Before this era, most investors believed that skilled professionals who were well-informed could outsmart the market by uncovering hidden opportunities.

“The conventional wisdom at the time was to find a person who has access to information, works really hard — not to trust the markets to do their job,” Eugene Fama, a director at Dimensional Fund Advisors and one of several Nobel Prize winners who work at the firm, says in the documentary.

The film shows how these academics used data and mathematical models to poke holes in this thinking.

The turning point came in 1952, when Harry Markowitz published his groundbreaking work on portfolio selection. Markowitz’s insight was simple but profound: Rather than focusing on individual stocks, investors should construct portfolios that balance risk and return through diversification.

By combining assets that don’t move in lockstep, the overall risk of the portfolio can be reduced even as returns remain strong. That was the birth of modern portfolio theory, now a common strategy in any financial planner’s toolbox.

The revolution accelerated in the 1960s, as researchers like Eugene Fama, Robert Merton and Myron Scholes were able to make use of the newly emerged data sets of market data.

“The market is a big information processing machine. If you’re going to beat the market, you’ve got to be faster,” Booth says in the film. “Trying to outguess the market is more like gambling —it’s not investing.”

"Tune Out the Noise" also highlights how these insights led to the creation of index funds and democratized investing, allowing millions to participate in market growth without needing to become financial experts.

These early pioneers of financial economics, by collecting and analyzing vast amounts of market data, laid the groundwork that Jack Bogle, known as the father of indexing, would later use to create the first index mutual fund aimed at retail investors at Vanguard in 1976.

“Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course,” Bogle told the New York Times in 2012. “And they won’t be foolish enough to think that they can consistently outsmart the market.”

While "Tune Out the Noise" can be a helpful reminder to have a level-headed approach to long-term investing, it is not always applicable, according to some investors.

Maleeha Bengali, who actively manages her clients’ portfolios through women-focused asset management platform AWAAM Consulting, says the success rate of passive investing depends on the economy and what kind of cycle you are in.

“If you're, let's say, in a deflationary cycle, it works beautifully,” she said. “But now, as we enter into a new 20-year economic cycle of inflation, this may not work. The next 15 to 20 years will not be as easy as the last."

In fact, researchers at Goldman Sachs recently predicted that the S&P 500 will only return a compound rate of 3% a year over the next 10 years, noting that “equities will face stiff competition from other assets during the next decade." That may prompt more investors to seek higher returns through active management.

Mark Hawtin, head of the Global Equities team at Liontrust, recently cited market concentration, record margins and valuation as key risks for the passive investing strategy.

“Passive investors have ridden the wave of innovation, and that ride has been easy,” he said in a note published in January 2025. “However, we are at or close to a peak in the trend that will make it very hard to achieve a satisfactory return in equity markets through passive investing alone. The case for increasing active strategies is compelling.”

Rather than trust and copy the market blindly the way previous generations have, consumers might consider a more creative strategy that combines active and passive investment, taking into account their risk tolerance and years left before retirement.

Smaller S&P returns mean that more people will evaluate the traditional 60-40% portfolio allocation, with 60% going to equities and 40% to bonds, and start seeking better returns elsewhere.

"If you're in a market period where there is a recession or stagflation, being long on the market [alone] won't work,” Bengali said. “You've got to be active, and be short and long. And that's something that people are not used to."