The first step on the index funds journey is to recognize
active investor behavior. If all investors were lined up in a row, could
the active investors be identified? Active investors actively engage in
stock picking, time picking (market timing), manager picking, and style
picking. They usually share the following thoughts and behaviors:
• Own or plan to own actively managed mutual funds.
• Select stocks they think can outperform a market. We call this
stock picking.
• Think there are times to be in a market and times to be out of
a market. We call this time picking, generally known as market timing.
• Think that active managers with the best track records are the
ones to select to manage their investments. We call this manager picking.
• Shift in and out of styles or indexes in an effort to chase returns,
e.g., from large cap to small value. We call this style picking.
• Are primarily invested in the S&P 500, thinking this provides
adequate diversification.
If you show those signs, you are engaging in active
investing and can benefit greatly from this 12-Step Program.
If not, you are well on your way towards understanding the benefits of a
diversified portfolio of index funds, which is the basis of Index Funds Investing.
Keep reading, you will soon understand the wisdom of index funds, how much
wealth you may have lost in the past, and how much you can accumulate if
you learn how to change the way you invest. Let's start!
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"
Properly measured, the average actively managed dollar must underperform
the average passively managed dollar, net of costs. Empirical
analyses that appear to refute this principle are guilty
of improper measurement." |
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William F. Sharpe, Nobel Laureate
in Economics, 1990, The Arithmetic of Active Management,
The Financial Analysts' Journal Vol. 47, No. 1, January/February
1991. pp. 7-9. |
|
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"
Most investors are pretty smart. Yet most investors also remain
heavily invested in actively managed stock funds. This
is puzzling. The temptation, of course, is to dismiss
these folks as ignorant fools. But I suspect these folks
know the odds are stacked against them, and yet they
are more than happy to take their chances." |
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Jonathan
Clements; The Wall Street Journal, February 27, 20 01 |
|
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"
The deeper one delves, the worse things look for actively managed
funds." |
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William
Bernstein, The Intelligent Asset Allocator |
|
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"The sheer magnitude
of the difference we discovered between the total returns
earned by funds and the results captured by the average shareholder
is shocking and tragic." [over 4 years: Funds = 5.7%,
Investors = 1%] |
|
Charles
Trzcinka, Professor of Finance, Indiana University. Money Magazine,
June 2002. What Fund Investors Really Need to Know,
by Jazon Zweig ( see
1.3.3) |
|
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"
[ Most investors would ] be better off in an index fund." |
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Peter
Lynch, famous stock picker, Barron's, p. 15, April 2, 1990 |
|
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"Over the
10-year period ending 2003, 142 of the largest, smartest
pension funds in the USA lost an average 0.3% per year in
their active large cap domestic equities programs, relative
to simply investing in index funds." |
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Keith
Ambachtsheer, author of The Ambachtsheer Letter Independence,
p.90 June 8, 2005 |
|
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"
Most of the mutual fund investments I have are index funds, approximately
75%." |
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|
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"So who
still believes markets don't work? Apparently it is only
the North Koreans, the Cubans and the active managers." |
|
Rex
Sinquefield, Active vs. Passive Management, October
1995 |
|
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"..the
best way to own common stocks is through an index fund..." |
|
Warren
Buffett, Berkshire Hathaway, Inc. 1996 Shareholder Letter |
|
 |
"
The results of this study are not good news for investors who
purchase actively managed mutual funds. No investment style
generates positive abnormal returns over the 1965-1998
sample period. The sample includes 4,686 funds covering
26,564 fund-years. " |
|
James
L. Davis, Mutual Fund Performance and Manager Style,
Financial Analysts Journal 57 (2001): 19-27 |
|
|
"
The common theme unifying this book is that security markets
are nearly efficient, meaning most securities are usually
priced appropriately given their risk and return attributes."
(from Underlying Philosophy, pp. vii) "Proponents of the
efficient market hypothesis believe that active management is
largely a wasted effort and unlikely to justify the expenses
incured. Therefore, they advocate a passive investment strategy
[index funds] that makes no attempt to outsmart the market.
" |
|
Investments (pp.
349) ,
Bodie, Kane, and Marcus. [ Investments is the leading
investment text at business schools. It is used at the nation's
top business schools including Harvard, MIT, Chicago,
Wharton, and Northwestern and has been translated into several
foreign languages.] |
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 |
"
The excitement that a gambler feels when making a bet is equal
to the amount he might win times the probability of winning
it." |
|
Blaise
Pascal, 1623-1662, Mathematical Maxims and Minims by
N. Rose, Raleigh N C 1988. |
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