What is the benefits of Indexing?

1. Low cost: 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 (play the odds).

3. Diversification: The increased diversification of index funds results in lower risk. Baer & Ginsler did a study of Standard Deviaton 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. Consistancy: 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, never falling below average, it outpaced 93 % of all large-blend stocks after taxes (12/31/2014).

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 worry about underperforming a benchmark index: Many current best performing managed funds later seriously underperform (U.S. Growth, Magellan, Legg Mason Value Trust, etc.). It is much more important to avoid losses than to achieve extra gains.

10. No worry about "asset bloat" which often causes large successful funds to underperform (Magellan, once the world's largest fund).

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

12. Less worry that a manager has "lost his touch." Index funds are expected to return to profitability.

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

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

15. 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.

16. For the serious investor seeking a better understanding of index funds, read this 2004 article by Jack Bogle: The Index Fund Moves from Heresy to Dogma
 
Back
Top