Newspaper article THE JOURNAL RECORD

Index Investing Not as Simple as It Might Seem

Newspaper article THE JOURNAL RECORD

Index Investing Not as Simple as It Might Seem

Article excerpt

NEW YORK -- Any time you go shopping for a stock-index mutual fund, don't limit your search to funds based on the Standard & Poor's 500 composite.

These days, there are many other types of index funds to choose among. In the eyes of a growing number of analysts, some of the alternatives offer greater diversification and less risk than the hyper-popular S&P 500 funds.

Since it began to gain momentum about 20 years ago, the index investing movement has largely focused on the S&P 500 because that was the standard against which professional investors measured themselves. In the last few years, S&P 500 funds have attracted extra attention because they have achieved outstanding results, racking up better returns than a vast majority of the managed funds against which they compete. Along the way, the character of the S&P 500 itself, which gives greatest weight to its component stocks with the largest market values, has changed. As the shares of a few dozen big growth companies soared, some observers said, the S&P 500 owed more and more of its cachet to fewer and fewer stocks. Last year, the S&P 500 climbed more than 26 percent, notes Tom Bellhy, president of the Pittsburgh investment advisory firm of Fort Pitt Capital Group. But if you excluded the top 20 performers among its component stocks, he says, the index's gain shrank to barely more than 7 percent. The funny thing is, S&P 500 funds, set up as a way to escape the high-cost, high-risk performance derby among stock-fund managers, have themselves become a worshipped icon in the cult of performance. All too often, history teaches, fund investors who chase performance wind up with severe disappointment instead. But if S&P 500 investing has changed, the basic principles of index investing haven't. Practiced right, it still offers a handy way to invest in a broadly diversified stock portfolio at low cost, avoiding all the research and trading expenses that arise in an actively managed fund. To get away from the S&P 500 hubbub, you can simply look at funds based on other, broader market indexes. Vanguard Group, which sponsors by far the biggest, best-known 500 fund, also runs about two dozen other stock-index portfolios. …

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