Index Investing
INDEX INVESTING, PART I - THE BASICS
Index Investing is a strategy that consists of investing in passively-managed mutual funds and/or ETFs that are designed to mimic a particular index (i.e. S&P 500, NASDAQ 100, Russell 2000). Typically, index fund advisors use one of three fund families which are: Dimensional Fund Advisors (DFA Funds), Vanguard and Fidelity Spartan funds. (If you advisor recommends any other family for index funds, you’re likely paying too much.)
Indexes were originally created by the Dow Jones Corporation around the turn of the 20th Century.
INDEX INVESTING, PART II - ADVANTAGES OF INDEX INVESTING
There are a large number of American financial advisors who are deeply committed to the idea that MPT is one of the greatest financial innovations in investing since the creation of the equity markets themselves. I refer to these Index fund advisors as MPTer’s. I will argue that while there are better solutions than indexing, it does provide a sound means of allocating capital.
INDEX INVESTING, PART III - DISADVANTAGES OF INDEX INVESTING
While I believe that index investing has its merits, I do not believe that it is the only means of getting your investment compass to point true north. Advisors who buy into MPT fail to acknowledge the many issues with indexing – so allow me to provide some counterpoints to their argument.
Let’s start with the philosophical. To say the markets are efficient is to assume that man is infallible. Anyone making that assumption needs to check out the nightly news.
INDEX INVESTING, PART IV - HOW MUCH SHOULD YOU PAY FOR AN INDEX INVESTING STRATEGY
In short, the answer is very little. Index investing is basically a commodity and the profit margin on a commodity will eventually be reduced to zero. In order to manage a portfolio of index funds, advisors are required to carry out the following two points of execution:
Step 1: Pick an appropriate model portfolio out of a book based on your age and risk tolerance, assign your account to that model and click the mouse on the button that says “Allocate Portfolio”. (Time spent – 15 minutes.)
Step 2: Repeat Step 1 every 12 months.
