Newspaper article St Louis Post-Dispatch (MO)

Seek Variety When Buying Index Funds

Newspaper article St Louis Post-Dispatch (MO)

Seek Variety When Buying Index Funds

Article excerpt

Stock investors currently hold an estimated $102 billion in index mutual funds, which time and again have proved to be a splendid choice. Indexers do much better than the averaged fund, as long as they're using a low-cost fund and buying U.S. big-company stocks.

But battles still rage over specialty funds - small stocks, internationals and emerging markets. Is indexing equally valid there?

The question is important because big companies won't always be the market leaders. At some point - no one knows when - you'll get better performance from other sectors. That's why experienced investors diversify. Some chose index funds for these sectors, others aren't so sure. An index fund buys and holds the stocks that make up a particular market index, such as Standard & Poor's 500. The fund behaves exactly the way that market does, with a slight reduction to account for management costs. Competing funds, by contrast, try to beat the market. They're managed by stock-pickers who constantly buy and sell, hoping for superior returns. You pay for that hope in much higher annual fees. But the stock-pickers' record isn't so great, compared with Vanguard's low-cost Index Trust-500 Portfolio, which mirrors the S&P 500. Over 10 years ending last December, Vanguard's S&P index fund returned 15 percent annually, compared with 13.1 percent for similar managed funds. Over the past three years, Vanguard has beaten 90 percent of them. Fund managers argue that Vanguard's record is pure luck. During that period, big-company stocks - like those in the S&P 500 - did especially well. Managed funds include smaller stocks, so they naturally fell behind. That argument doesn't wash with me. The reason you pay managers is to avoid stocks that fall behind. If they can't, they don't earn their keep. Stocks do run in cycles. Eventually, smaller stocks will perk up and a more managers will beat the S&P. But that is exactly the indexers' point. When the stock-pickers win, it's not because they're geniuses, as investors and other worshippers think. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.