5 Reasons to Add Index Funds to Your Portfolio

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Mel Lindauer
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5 Reasons to Add Index Funds to Your Portfolio

Post by Mel Lindauer » Fri Sep 06, 2013 12:16 pm

This article by Dan Solin is a good read.
The “debate” has all but disappeared, as the evidence in favor of index investing (which I like to call “evidence-based investing”) has mounted.
http://money.usnews.com/money/blogs/On- ... -portfolio
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14 Reasons to Add Index Funds to Your Portfolio

Post by Taylor Larimore » Fri Sep 06, 2013 2:09 pm

Mel:

Thank you for the excellent article by Mr. Solin.

Below are 14 Reasons to add Index Funds:

1. Lower cost: Morningstar research has shown that "low-cost" is the best predictor of future returns. Index funds have much lower costs than most managed funds.

2. Higher returns: Index funds (on average) have higher returns than managed funds as this Standard & Poor's Study concluded.

3. Lower risk: The increased diversification of index funds results in lower risk. Baer & Ginsler did a study of Standard Deviation for actively managed funds vs. the total stock market over both 5 and 10-year periods. Their conclusion: "The returns of actively managed funds were 20 to 25% more volatile than the broad market."

4. Consistency: Vanguard's Total Stock Market Index Fund ranked among the top 25% of large-blend funds in just three of the past 10 years. Nevertheless, because of it's consistency, only once falling below average, it outpaced 88% of all large-blend stock funds after taxes. (8/31/2013)

5. Continuation: Of 355 actively managed equity mutual funds around in 1974, less than half survive today. Indexers do not have to worry that their fund will disappear.

6. No style drift: We know that asset allocation determines about 90% of portfolio performance. Managed fund allocations often change.

7. No overlap: It is almost inevitable that a portfolio of managed funds will have overlap. This is not a problem with index funds.

8. No manager changes: History tells us that the average manager leaves within five years. Index fund investors do not worry about manager changes.

9. "No asset bloat" which often causes large successful funds to underperform (Magellan, Leg Mason Value Trust, etc.).

10. Less cash dilution. Index funds hold less cash than active funds.

11. Under-performance: No worry that a manager has "lost his touch."

12. Tax-Efficiency: Index funds are significantly more tax-efficient than most managed funds. It is after-tax return that counts.

13. Low maintenance: Index funds are simple, predictible, and easy to understand, explain, and maintain.

14. Peace of mind: Indexers know the averages are always working for them. The index investor has much less worry and more free time to spend with family and other more enjoyable endeavors.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by peppers » Fri Sep 06, 2013 8:12 pm

No.14 says it all. :wink:
"..the cavalry ain't comin' kid, you're on your own..."

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Sbashore » Sat Sep 07, 2013 10:12 am

Thanks Mel. Good article. A well reasoned reply to that "indexers are parasites" argument.
Steve | Semper Fi

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Dick Purcell » Sat Sep 07, 2013 11:05 am

Mel and Taylor --

Superb sets of points!

Right now, investment advisors are being given “fiduciary” credentials for ignoring your points in ways that are not only bad advice but also presented deceptively – dishonestly.

At Fiduciary360, which masquerades as a leader of “fiduciary” investor guidance, they offer a “fiduciary” investment-selection software system established under the leadership of Donald Trone, who masquerades as a great crusader for the fiduciary standard. That software tool guides advisors to:
  • (a) select an allocation of whole diversified asset classes

    (b) and then, for actual placement of the investor’s money, consider an actively managed fund as if a gamble on an active manager or fund were faithful execution of investment in the chosen whole diversified asset class.
This is of course not only terrible guidance but also dishonest presentation of the misguidance, for all the reasons your posts reveal.

This turns the Fiduciary Standard into cover for dishonestly-presented feed-the-active-manager-fee-machine malpractice.

It’s why I think there should be no promotion of the Fiduciary Standard unless it is preceded or accompanied by a Fiduciary EDUCATION Standard.

I hope this issue comes up at the forthcoming Bogleheads meeting.

Dick Purcell

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Mel Lindauer » Sat Sep 07, 2013 11:14 am

Dick Purcell wrote:Mel and Taylor --

Superb sets of points!

Right now, investment advisors are being given “fiduciary” credentials for ignoring your points in ways that are not only bad advice but also presented deceptively – dishonestly.

At Fiduciary360, which masquerades as a leader of “fiduciary” investor guidance, they offer a “fiduciary” investment-selection software system established under the leadership of Donald Trone, who masquerades as a great crusader for the fiduciary standard. That software tool guides advisors to:
  • (a) select an allocation of whole diversified asset classes

    (b) and then, for actual placement of the investor’s money, consider an actively managed fund as if a gamble on an active manager or fund were faithful execution of investment in the chosen whole diversified asset class.
This is of course not only terrible guidance but also dishonest presentation of the misguidance, for all the reasons your posts reveal.

This turns the Fiduciary Standard into cover for dishonestly-presented feed-the-active-manager-fee-machine malpractice.

It’s why I think there should be no promotion of the Fiduciary Standard unless it is preceded or accompanied by a Fiduciary EDUCATION Standard.

I hope this issue comes up at the forthcoming Bogleheads meeting.

Dick Purcell
Hi Dick:

Did you post any questions you'd like discussed on the threads where I'm collecting the questions for the Q&A with Jack and the Q&A with the Experts? If not, I suggest you do so now. Here are links to the two threads where you can post your questions.


http://www.bogleheads.org/forum/viewtop ... 1#p1717261
http://www.bogleheads.org/forum/viewtop ... 2#p1706252
Best Regards - Mel | | Semper Fi

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Dick Purcell » Sat Sep 07, 2013 11:38 am

Thanks, Mel. Will do.

Dick Purcell

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by nisiprius » Sat Sep 07, 2013 11:39 am

I guess I don't understand why these are presented as reasons to "add" index funds to your portfolio. What does Mr. Solin think is the appropriate percentage of one's portfolio that ought to be in index funds?
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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Mel Lindauer » Sat Sep 07, 2013 12:13 pm

nisiprius wrote:I guess I don't understand why these are presented as reasons to "add" index funds to your portfolio. What does Mr. Solin think is the appropriate percentage of one's portfolio that ought to be in index funds?
Based on his affiliation with Larry's outfit, my guess would be 100%, nisi.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham Asset Management.
Best Regards - Mel | | Semper Fi

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Beagler » Sat Sep 07, 2013 3:30 pm

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Dan Solin's Investment Gems

Post by Taylor Larimore » Sat Sep 07, 2013 5:21 pm

In 2006 I added Dan Solin's first book to my investment Gems (despite what I think is its poor title)._ At that time he recommended The Three Fund Portfolio.

Gems from "The Smartest Investment Book"

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Taylor
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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Beagler » Sat Sep 07, 2013 7:36 pm

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Dan Solin

Post by Taylor Larimore » Sat Sep 07, 2013 8:20 pm

Dan Solin is the bestselling author of the Smartest
series of investing books, which have been
enthusiastically endorsed by The NewYork Times,
TheWall StreetJournal, and Vanguard founder
John Bogle, among others. Kiplinger’s listed The
Smartest Investment BookYou’ll Ever Read on its
top ten list of the best financial books ever
written; two of the Smartest series have achieved
best-seller status on The NewYork Times Review
of Books. Dan also writes financial blogs for The
Huffington Post and USNews.com.
A former securities attorney, Dan graduated
from Johns Hopkins University and the University
of Pennsylvania Law School.
APT noted that Dan “had the necessary
credentials to host and lead these discussions…
and we expect that the series will resonate with
the educated and inquisitive viewers who frequent
public television.”
http://www.smartestinvestmentbook.com/S ... ackage.pdf

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Beagler » Sat Sep 07, 2013 9:22 pm

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by protagonist » Sun Sep 08, 2013 10:49 am

peppers wrote:No.14 says it all. :wink:
I agree...#14 is the most important.

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by pinot3 » Sun Sep 15, 2013 9:57 am

Hopefully someone can clarify to me why John Bogle and others on this forum support active funds like Wellington and Wellesley. I appreciate your replies ahead of time.
pinot3 / total expense ratio: .06%

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by ruralavalon » Sun Sep 15, 2013 10:20 am

pinot3 wrote:Hopefully someone can clarify to me why John Bogle and others on this forum support active funds like Wellington and Wellesley. I appreciate your replies ahead of time.
I don't own any Wellington, but sometimes its history. The fund was bought decades ago in a taxable account, has large gains, its low expense ratio fund, and so its foolish to sell now and create tax liabilty to switch to an index fund with a similar expense ratio.

discussion, is it index vs not-index that matters ?

Sometimes the non-index fund is the best offered in your 401k.

Sometimes the non-index fund, for example PIMCO's PTTRX or any from Dodge & Cox, really is very good, has a moderate expense ratio (a low expense ratio by the standards of anyone other than a boglehead) and has performed well for decades. I don't own any PTTRX or Dodge & Cox funds.

Sometimes its to own individual bonds ("expense ratio" = zero), rather than own any fund. Vanguard's "actively" managed bond funds have exprense ratios just as low as the few bond index funds they offer. We do own indivdual bonds, being held to maturuiity, and Vg Investment Grade Adm, an "actively" managed fund with an expense ratio of 0.10%, just as low as any VG bond index fund.
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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by Taylor Larimore » Sun Sep 15, 2013 10:23 am

pinot3 wrote:Hopefully someone can clarify to me why John Bogle and others on this forum support active funds like Wellington and Wellesley. I appreciate your replies ahead of time.
pinot3:

Mr. Bogle helps answers your question in this interview with Consuelo Mack :

http://www.investmentnews.com/section/v ... e=20121126

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: 5 Reasons to Add Index Funds to Your Portfolio

Post by abuss368 » Sun Sep 15, 2013 10:34 am

Thamks for posting the article.

A couple of points raised here:

1). Jack Bogle has mentioned in earlier interviews that when he began his career there were only active funds and that Wellington is near and dear to him.

2). Jack Bogle has also given compliments to the gang at Dodge & Cox because the fees are a lot lower than other firms and also that the managers invest their own money in these funds along side other shareholders.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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