Friday, January 15, 2010

More Proof Indexing Works

In this month's Forbes magazine, Rick Ferri talks about the performance of a basic index fund strategy over the past decade in his column 'A Decent Decade for Investors'. He calls it the 'Core-4' because he uses four Vanguard index funds - Total Bond Market, Total International Stock, Total US Stock Market, and REIT Index. His breakdown of the equity component of the portfolio always has the same ratio - 60% Total US, 30% Total International and 10% REIT, very similar to the allocation ratios that we employ at TFP (although we take an approach that expands on that basic theory with tilts toward small and value stocks per the Three-Factor Model, our overall domestic, foreign and real estate ratios are the same).

Ferri calculates that the returns on blended portfolios of those four funds for the decade ending 12-31-09 range from 3.1% to 5.4%, while the Consumer Price Index was 2.6% over that same time. Hardly a 'lost decade', as so many would have us believe. As Ferri says in the article "All portfolios outperformed the CPI, and that means all portfolios made money in real terms. Since this is true, was the first decade of this millennium really an investor's Hell? Not as I see it."

Active-management proponents often claim that when the markets go up index investing looks good, but when markets drop indexing doesn't produce results.

That sounds good, but the facts tell a far different story.

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