Broker Check

Is Indexing Enough?

April 25, 2017
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I came across an article from author and WSJ financial journalist Jason Zweig the other day pointing out that it has now been 20 years since he was publicly extolling the virtues of index fund investing via the S&P 500.  We take for granted today the superiority of index funds over actively managed funds -- the former consistently outperform 60% to 75% of the time and result in about a 1% a year (over time) higher return compared to the average surviving actively managed fund.  Trust me, 20 years ago this was trailblazing stuff.

Unfortunately, any mention of "indexing" back then, and too often today, is relegated to large cap, growth-oriented stocks that dominate the S&P 500 and "Total" Market Index funds.  And while I won't deny the importance of indexing, I'm continually frustrated by the lack of a discussion around asset allocation within the context of an index-based investing approach.  As the chart above shows, owning index funds in US asset classes other than large cap growth stocks (S&P 500) has had a much greater impact on overall returns than the choice between index and active investing.  

So by all means, let's continue to educate investors about the merits of holding low-cost, diversified index and asset class mutual funds instead of security selection and market timing based active managers.  But indexing isn't enough.  Let's not forget that it's asset allocation, not index vs. active or small differences in expense ratios, that has the largest impact on long-term investment outcomes.

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