Eugene Fama

Testimonials To Indexing From Leading Investment Experts

Eugene Fama

John C. Bogle is one of the most respected leaders in the mutual fund industry and is Chairman of the Vanguard Group of Investment Companies, the second largest mutual fund family in the world. Bogle was the driving force in the creation of the world's first index mutual fund for individual investors in 1976. Bogle notes. "Vanguard is the sole apostle of indexing" among all mutual fund companies. Approximately $85 billion is indexed by Vanguard for individual and institutional investors.

Bogle explains why indexing is such a logically compelling method of investing. "In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows. All mutual fund managers together provide average investment performance (those who do well are offset by those who do not do so well). But in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

"There are three reasons for this: superior diversification, lower annual operating expenses and lower taxes. That's why indexers recognize that the advantages of indexing lie, not in impressive short 'sprints' of strong investment performance such as in 1995, 1996 and 1997, but with the steady, cumulative power of broad diversification and lower expenses and taxes."

Rex A. Sinquefield is Co-Chairman of Dimensional Fund Advisors Inc. Over twenty years ago, Sinquefield and Roger G. Ibbotson were the first to compile and present in an organized way historical investment data which has come to be widely used in the investment world. DFA is a worldwide leader in the practical application of academic theories to the management of asset class index funds. DFA manages more than $20 billion for over one hundred institutional investors.

Sinquefield describes the strong theoretical support for indexing. "A large volume of academic studies examining the performances of mutual funds under actual market conditions establishes very convincingly that the 'beat the market' efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is thereforeunmistakably obvious: the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds."

Paul A. Samuelson became the first American to win the Nobel Prize in Economic Science in 1970 and is one ofthe most influential economists ofthe twentieth century. He concisely summarizes the case for indexing. "The most efficient way to diversify a stock portfolio is with a low fee index fund. Statistically, a broadly based stock index fund will outperform most actively-managed equity portfolios. Hardly ten of one thousand [money managers who pick stocks and time markets] perform in a way that convinces a jury of experts that a long term edge over indexing is likely."

Jane Bryant Quinn is the Newsweek financial affairs columnist and best-selling author of Making The Most of Your Money. She describes the problems faced by investors when they attempt to pick active mutual fund winners and how investing in index funds can avoid these problems: "Indexing is for winners only. Let's see why this is true. Every month in the personal finance magazines you are seduced by the promise of Funds To Buy Now! The truth about funds on the Top Ten lists is that most of them will not do as well as the major market indexes such as the S&P 500.

"Their highly paid managers face two almost insuperable tasks. They have to pick stocks that go up in price by more than other investors expect - which usually is not possible in a world where so many players know so much. They also have to cover their costs: say, 1.5 per cent in annual expenses and for some funds, sales loads. On the other hand index mutual funds are easy, inexpensive, save taxes and help investors diversify. In this light, it's not hard to understand that some of the most successful investments such as index funds often are the simple ones."

Burton G. Malkiel is the author ofthe best-selling investment guide, A Random Walk Down Wall Street, and a professor of economics at Princeton University. Malkiel observes. "Index funds allow investors an opportunity to buy securities of all different types and are a sensible, serviceable method of obtaining the benefits of equity (as well as bond) investing with no effort, minimal expense and considerable tax savings."

Douglas Dial is portfolio manager of the CREF Stock Account Fund which is part of the Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF). CREF is the largest single pool of money invested in stocks in the world. Although Dial was formerly a stock picking money manager, he has seen the light and become a strong proponent of indexing." "Indexing is a marvelous technique. I wasn't a true believer. I was just an ignoramus. Now I am a convert. Indexing is an extraordinarily sophisticated thing to do."

Dial warns investors that the stock picking and market timing activities of active money managers aren't prudent because they "will produce greater deviations from market returns." "Given that these are retirement assets, avoiding the terrible downer is worth the price of missing the moon-shot years. If people want excitement, they should go to the race track or play the lottery."

The investment goal of many long term investors is the maximum accumulation of wealth after expenses, costs, commissions and taxes with a minimum amount of stress. These testimonials from leading investment experts attest to the fact that the most efficient and effective way to achieve this goal is to participate in the indexing investment revolution.

From Index Mutual Funds: Profiting from an Investment Revolution[/:Author:] Copyright, ©, 1998 by Wendell Scott Simon.
Reprinted by permission. All rights reserved.