Index funds (either mutual or exchange traded) are funds with clearly defined sets of rules of ownership, that are adhered to regardless of
market conditions. There are about 1,000 index funds available to investors. We like many of them, but our current favorite are the index funds or
passively managed funds from Dimensional Fund Advisors.
IFA offers 100 Index Portfolios, which are individualized and indexed. The Index Portfolios are
allocated among three broad asset classes: fixed income (bonds), U.S. stocks, and foreign stocks. The stocks are further divided by size and value (book-to-market ratio).
General asset allocations for 20 of these portfolios are presented below in Figure 1. The portfolios are labeled 5 through 100
in five-point increments. IFA Index Portfolio 5, which has the lowest expected risk and return, is tilted toward fixed income with a minor investment in stock.
Conversely, IFA Index Portfolio 100, which has the highest expected risk and return, has no fixed income and the stock indexes are tilted toward small and value
companies in the U.S. and international markets.
According to the Financial Economists Roundtable, index portfolios are the best
estimates of the principal risk factors that are likely to influence fund risks and returns in the future.
For an explanation as to why asset allocation explains 100% of your long term expected risk and return, please read this article:
Investment Policy Explains All, or read more on Risk & Return.