Colored Chairs on Beach

Index Your Way to Investment Success

Colored Chairs on Beach

Among indexing books, Index your Way to Investment Success has the most comprehensive description of how to build an investment plan. It presents a simple investment strategy and then describes ways to enhance the strategy in hopes of higher return.

The authors start off with the obligatory ode to the advantages of index funds. They also include some interesting passages about the early history of passive investing and the derision with which the early indexing proponents were met.

Next, the book looks at the indexes tracked by index funds and gives a thorough description of how they work and how index funds are run. An analysis of the cost advantage of index funds is then presented which includes operating expenses, transaction costs, sales loads, and taxes. From this exercise, the authors devise what they call the "rule of 1-2-3":

"In order to equal the return of the benchmark index fund, the actively managed mutual fund must invest in issues that average a significantly higher annual rate of return: about 1% for bonds, 2% for large-cap stocks, and 3% for [mid- and small]-cap stocks." (p. 129)