Sunday, March 09, 2014

All Index Funds, All The Time

Since it's Sunday afternoon, a little investing advice.

Larry Swedroe is one of my gurus. Last month he gave a talk on why almost everyone should put their money in diversified index funds. ...

Larry makes excellent points in the linked video. Here's a summation of one of them:

Passive investors [people who put their money in index funds] do accept that the market price is the best estimate of the right price.

Who is setting market prices? They’re set by active investors who are looking forward, paying attention to company prospects and market conditions. And for every active manager that beats the market, there must be another that underperforms.

Collectively, active managers must always underperform passive investors in all asset classes and in bull or bear markets because of expenses. It’s just simple math.

Think of it this way: To pick the "right" actively managed fund, you've got to research and choose the active fund manager who is likely to outperform his peers, all of them investing in the same market that he is. And the manager has to outperform the market enough to offset costs that will likely run 1% or more.

Good luck with that.

But don't believe me. Plenty of studies have shown that active funds almost always lose to their indexed cousins:

A new white paper by Portfolio Solutions and Betterment, "The Case For Index Fund Portfolios,"pretty much solidifies all we've ever known or guessed about low-cost, passively managed index funds –– they can rarely be beaten.

Looking at advanced portfolios holding 10 asset classes between 1997 and 2012, researchers found index fund portfolios outperformed comparable actively managed portfolios a staggering 82% to 90% of the time. And the longer investors held those investments, the better shot they had at outperforming active funds over time.

Still not convinced? Even lowering the cost of actively managed fund portfolios couldn't offer a boost significant enough to outperform index funds, the researchers found. ...

Finally, here's Paul Merriman's reasons for traveling the index road:


1) You get wide diversification in a single package.

2) Index funds have low operating expenses. An index fund has no need to pay a staff of analysts.

3) Index funds have low internal trading expenses, because they simply don’t trade very often.

4) Because of their lower turnover, index funds reduce your tax exposure.

5) Index funds give you control of your exposure to the specific asset classes you want.

6) When you buy an index fund, you know what you’re getting - the performance of an index.

7) You will most likely get above-average returns.

8) You won’t have to worry about monitoring the performance of an index fund manager.

9) Index funds are easy to rebalance on schedule without worrying whether you will miss out on a manager’s “hot streak.”

10) Index funds are good for one-decision investors.

11) Index funds don’t keep your money idle in cash.

12) It’s easy to choose index funds. Pick your asset class, then find the most efficient index fund that follows it.

13) Index funds are favored by Nobel Prize winning economists, Warren Buffett, John Bogle, Charles Schwab, almost all academics.

Sounds like a no-brainer to me.


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