Index Fund Quotes

It’s not possible for investors to consistently outperform the market. Therefore you’re best served investing in a diversified portfolio of low-cost index funds [or exchange-traded funds].

The fight against climate change is often an opportunity for banks, financial institutions, and ratings agencies to develop a new marketing product, a new green bond, and a new net-zero tracker index fund as often as they can.

Hold an index fund for 20 years or more, adding new money every month, and you are all but certain to outper-forms the vast majority of professional and individual investors alike. Late in his life, Graham praised index funds as the best choice for individual investors, as does Warren Buffett.6

After adjusting the comparison of index funds to actively managed funds for survivorship bias, taxes, and loads, the dominance of index funds reaches insurmountable proportions. Once

But the simple truth is this: the more complex an investment is, the less likely it is to be profitable. Index funds outperform actively managed funds in large part simply because actively managed funds require expensive active managers. Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.

Two-thirds of professionally managed funds are regularly outperformed by a broad capitalization-weighted index fund with equivalent risk, and those that do appear to produce excess returns in one period are not likely to do so in the next. The record of professionals does not suggest that sufficient predictability exists in the stock market to produce exploitable arbitrage opportunities.

Here is the crux of the strategy: Instead of hiring an expert, or spending a lot of time trying to decide which stocks or actively managed funds are likely to be top performers, just invest in index funds and forget about it!

In the mutual fund industry, for example, the annual rate of portfolio turnover for the average actively managed equity fund runs to almost 100 percent, ranging from a hardly minimal 25 percent for the lowest turnover quintile to an astonishing 230 percent for the highest quintile. (The turnover of all-stock-market index funds is about 7 percent.)

A Mind Is A Terrible Thing to Waste

Three things saved us: Our unwavering 50% savings rate. Avoiding debt. We’ve never even had a car payment. Finally embracing the indexing lessons Jack Bogle—the founder of The Vanguard Group and the inventor of index funds—perfected 40 years ago.

Would you believe me if I told you that there’s an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of finance professionals in the long run, and make you a millionaire over time?   Well, it is true, and here it is: Start by saving 15 percent of your salary at age 25 into a 401(k) plan, an IRA, or a taxable account (or all three). Put equal amounts of that 15 percent into just three different mutual funds:   A U.S. total stock market index fund An international total stock market index fund A U.S. total bond market index fund.   Over time, the three funds will grow at different rates, so once per year you’ll adjust their amounts so that they’re again equal. (That’s the fifteen minutes per year, assuming you’ve enrolled in an automatic savings plan.)   That’s it; if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors. More importantly, you’ll likely accumulate enough savings to retire comfortably.

Finding the next Warren Buffett is like looking for a needle in a haystack. We recommend that you buy the haystack instead, in the form of a low-cost index fund.

The simplest approach to diversifying your stock market investments is to invest in one index fund that represents the entire stock market.

When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there's almost no chance that you end up beating the index fund.

The best way to own common stocks is through an index fund.3

The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.

How to Steal from Wall Street If you ever want to see a banker sweat, try this: walk into your bank, ask to see a salesperson, and ask to put your savings into index funds. It’s the funniest thing ever.

The index fund is a most unlikely hero for the typical investor. It is no more (nor less) than a broadly diversified portfolio, typically run at rock-bottom costs, without the putative benefit of a brilliant, resourceful, and highly skilled portfolio manager. The index fund simply buys and holds the securities in a particular index, in proportion to their weight in the index. The concept is simplicity writ large.

Stocks are the things to own over time. Productivity will increase and stocks will increase with it. There are only a few things you can do wrong. One is to buy or sell at the wrong time. Paying high fees is the other way to get killed. The best way to avoid both of these is to buy a low-cost index fund, and buy it over time. Be greedy when others are fearful, and fearful when others are greedy, but don’t think you can outsmart the market. “If a cross-section of American industry is going to do well over time, then why try to pick the little beauties and think you can do better? Very few people should be active investors.

If you buy an S&P 500 index fund, your investment is highly diversified and its performance will match that of 500 leading U.S. corporations' stocks. Is it possible to lose all of your money? Yes, but the odds of that happening are slim and none. If 500 leading U.S. corporations all have their stock prices plummet to zero, the value of your investment portfolio will be the least of your problems. An economic collapse of that magnitude would make the Great Depression look like Lifestyles of the Rich and Famous.

The three Coffeehouse Investor principles offer a sensible starting point for a young college graduate who is starting to contribute to a company-sponsored retirement account. All it takes is a commitment to save and an investment in one simple index fund to build wealth, ignore Wall Street, and get on with your life. Time is on your side.   On

That’s when I realized it was really very simple. Index investing beats 85 percent of actively managed mutual funds.

The best long-term results come from buying a big, well-diversified portfolio of financial securities, and trading as little as possible.

Becoming a successful investor in future should be effortless when you understand and let the market do the work for you." - Adam Messina

Most individual investors would be better off in an index mutual fund.

The benefit of capturing the entire return of each asset class through low-cost index funds is that, in addition to the positive impact it will have on your financial wealth over the decades (quite possibly to the tune of hundreds of thousands of dollars, as we will find out in chapter 4), it is certain to have a profound influence on your emotional health as well.   Never

Warren Buffett, chairman of Berkshire Hathaway and investor of legendary repute: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

The risk you are likely to be rewarded for taking is the risk of owning all stocks. In effect, rather than betting on one roll of the dice, one spin at the roulette wheel, or a single hand at the blackjack table, you can own the whole casino. You can do this effortlessly, cheaply, and reliably by buying a total stock-market index fund, a low-cost portfolio of all the stocks worth owning.

It will also tell you how easy it is to do just that: simply buy the entire stock market. Then, once you have bought your stocks, get out of the casino and stay out. Just hold the market portfolio forever. And that’s what the index fund does. This investment philosophy is not only simple and elegant. The arithmetic on which it is based is irrefutable. But it is not easy to follow its discipline. So

Broad-market indexes like S&P 500 must rise over the long term. The upward path is the only logical direction. Prices can be suppressed for a short period, but eventually, the index will continue its course.

With real assets, everything is different. The price of real estate, like the price of shares of stock or parts of a company or investments in a mutual fund, generally rises at least as rapidly as the consumer price index.

Here’s a Reader’s Digest version of my approach. I select mutual funds that have had a good track record of winning for more than five years, preferably for more than ten years. I don’t look at their one-year or three-year track records because I think long term. I spread my retirement, investing evenly across four types of funds. Growth and Income funds get 25 percent of my investment. (They are sometimes called Large Cap or Blue Chip funds.) Growth funds get 25 percent of my investment. (They are sometimes called Mid Cap or Equity funds; an S&P Index fund would also qualify.) International funds get 25 percent of my investment. (They are sometimes called Foreign or Overseas funds.) Aggressive Growth funds get the last 25 percent of my investment. (They are sometimes called Small Cap or Emerging Market funds.) For a full discussion of what mutual funds are and why I use this mix, go to daveramsey.com and visit MyTotalMoneyMakeover.com. The invested 15 percent of your income should take advantage of all the matching and tax advantages available to you. Again, our purpose here is not to teach the detailed differences in every retirement plan out there (see my other materials for that), but let me give you some guidelines on where to invest first. Always start where you have a match. When your company will give you free money, take it. If your 401(k) matches the first 3 percent, the 3 percent you put in will be the first 3 percent of your 15 percent invested. If you don’t have a match, or after you have invested through the match, you should next fund Roth IRAs. The Roth IRA will allow you to invest up to $5,000 per year, per person. There are some limitations as to income and situation, but most people can invest in a Roth IRA. The Roth grows tax-FREE. If you invest $3,000 per year from age thirty-five to age sixty-five, and your mutual funds average 12 percent, you will have $873,000 tax-FREE at age sixty-five. You have invested only $90,000 (30 years x 3,000); the rest is growth, and you pay no taxes. The Roth IRA is a very important tool in virtually anyone’s Total Money Makeover. Start with any match you can get, and then fully fund Roth IRAs. Be sure the total you are putting in is 15 percent of your total household gross income. If not, go back to 401(k)s, 403(b)s, 457s, or SEPPs (for the self-employed), and invest enough so that the total invested is 15 percent of your gross annual pay. Example: Household Income $81,000 Husband $45,000 Wife $36,000 Husband’s 401(k) matches first 3%. 3% of 45,000 ($1,350) goes into the 401(k). Two Roth IRAs are next, totaling $10,000. The goal is 15% of 81,000, which is $12,150. You have $11,350 going in. So you bump the husband’s 401(k) to 5%, making the total invested $12,250.

Can you think of another business in the world that would continue to exist as a going concern even after it had been proven definitively—as John Bogle of Vanguard proved about the financial industry—that most of its products are vastly inferior to other, cheaper alternatives like index funds? I can’t. How about a business whose most prestigious firms have been caught defrauding their own customers not once, but over and over again? In the normal corporate world, would such a business not only continue to operate, but actually make more and more money every year? Of course not. It would be long dead by now. And yet deceiving its clients and foisting inferior and even fraudulent products on them is exactly how Wall Street stays in business!

I think it is time for a modern War Against Error. A deliberately heightened battle against cultivated ignorance, enforced silence, and metastasizing lies. A wider war that is fought daily by human rights organizations in journals, reports, indexes, dangerous visits, and encounters with malign oppressive forces. A hugely funded and intensified battle of rescue from the violence that is swallowing the dispossessed.

Monday ushers in a particularly impressive clientele of red-eyed people properly pressed into dry-cleaned suits in neutral tones. They leave their equally well-buttoned children idling in SUVs while dashing to grab double-Americanos and foamy sweet lattes, before click-clacking hasty escapes in ass-sculpting heels and polished loafers with bowl-shaped haircuts that age every face to 40. My imagination speed evolves their unfortunate offspring from car seat-strapped oxygen-starved fast-blooming locusts, to the knuckle-drag harried downtown troglodytes they’ll inevitably become. One by one I capture their flat-formed heads between index finger and thumb for a little crush-crush-crushing, ever aware that if I’m lucky one day their charitable contributions will fund my frown-faced found art project to baffle someone’s hallway.

they pale by comparison to the trading volumes of hedge funds, to say nothing of the levels of trading in exotic securities such as interest rate swaps, collateralized debt obligations, derivatives such as futures on commodities, stock indexes, stocks, and even bets on whether a given company will go into bankruptcy (credit default swaps). The aggregate nominal value of these instruments, as I noted in Chapter 1, now exceeds $700 trillion.

Speculators, meanwhile, have seized control of the global economy and the levers of political power. They have weakened and emasculated governments to serve their lust for profit. They have turned the press into courtiers, corrupted the courts, and hollowed out public institutions, including universities. They peddle spurious ideologies—neoliberal economics and globalization—to justify their rapacious looting and greed. They create grotesque financial mechanisms, from usurious interest rates on loans to legalized accounting fraud, to plunge citizens into crippling forms of debt peonage. And they have been stealing staggering sums of public funds, such as the $65 billion of mortgage-backed securities and bonds, many of them toxic, that have been unloaded each month on the Federal Reserve in return for cash.21 They feed like parasites off of the state and the resources of the planet. Speculators at megabanks and investment firms such as Goldman Sachs are not, in a strict sense, capitalists. They do not make money from the means of production. Rather, they ignore or rewrite the law—ostensibly put in place to protect the weak from the powerful—to steal from everyone, including their own shareholders. They produce nothing. They make nothing. They only manipulate money. They are no different from the detested speculators who were hanged in the seventeenth century, when speculation was a capital offense. The obscenity of their wealth is matched by their utter lack of concern for the growing numbers of the destitute. In early 2014, the world’s 200 richest people made $13.9 billion, in one day, according to Bloomberg’s billionaires index.22 This hoarding of money by the elites, according to the ruling economic model, is supposed to make us all better off, but in fact the opposite happens when wealth is concentrated in the hands of a few individuals and corporations, as economist Thomas Piketty documents in his book Capital in the Twenty-First Century.23 The rest of us have little or no influence over how we are governed, and our wages stagnate or decline. Underemployment and unemployment become chronic. Social services, from welfare to Social Security, are slashed in the name of austerity. Government, in the hands of speculators, is a protection racket for corporations and a small group of oligarchs. And the longer we play by their rules the more impoverished and oppressed we become. Yet, like

These new taxes and the nationalization of finance meant the U.S. government would soon be dealing with a healthy budget surplus. Universal health care, free public education through college, a living wage, guaranteed full employment, a year of mandatory national service, all these were not only made law but funded. They were only the most prominent of many good ideas to be proposed, and please feel free to add your own favorites, as certainly everyone else did in this moment of we-the-peopleism. And as all this political enthusiasm and success caused a sharp rise in consumer confidence indexes, now a major influence on all market behavior, ironically enough, bull markets appeared all over the planet. This was intensely reassuring to a certain crowd, and given everything else that was happening, it was a group definitely in need of reassurance. That making people secure and prosperous would be a good thing for the economy was a really pleasant surprise to them. Who knew?

WHY DIVERSIFY? During the bull market of the 1990s, one of the most common criticisms of diversification was that it lowers your potential for high returns. After all, if you could identify the next Microsoft, wouldn’t it make sense for you to put all your eggs into that one basket? Well, sure. As the humorist Will Rogers once said, “Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” However, as Rogers knew, 20/20 foresight is not a gift granted to most investors. No matter how confident we feel, there’s no way to find out whether a stock will go up until after we buy it. Therefore, the stock you think is “the next Microsoft” may well turn out to be the next MicroStrategy instead. (That former market star went from $3,130 per share in March 2000 to $15.10 at year-end 2002, an apocalyptic loss of 99.5%).1 Keeping your money spread across many stocks and industries is the only reliable insurance against the risk of being wrong. But diversification doesn’t just minimize your odds of being wrong. It also maximizes your chances of being right. Over long periods of time, a handful of stocks turn into “superstocks” that go up 10,000% or more. Money Magazine identified the 30 best-performing stocks over the 30 years ending in 2002—and, even with 20/20 hindsight, the list is startlingly unpredictable. Rather than lots of technology or health-care stocks, it includes Southwest Airlines, Worthington Steel, Dollar General discount stores, and snuff-tobacco maker UST Inc.2 If you think you would have been willing to bet big on any of those stocks back in 1972, you are kidding yourself. Think of it this way: In the huge market haystack, only a few needles ever go on to generate truly gigantic gains. The more of the haystack you own, the higher the odds go that you will end up finding at least one of those needles. By owning the entire haystack (ideally through an index fund that tracks the total U.S. stock market) you can be sure to find every needle, thus capturing the returns of all the superstocks. Especially if you are a defensive investor, why look for the needles when you can own the whole haystack?

The goal of the nonprofessional should not be to pick winners—neither he nor his “helpers” can do that—but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. —WARREN BUFFETT, 2013 letter to shareholders

fund offered by Vanguard. So if you can implement your investment with low-cost, passively managed indexed funds, you’re going to be a winner.

But for now, we simply recommend that for every dollar you put into individual stocks, you roll the same amount into an index fund.

Here’s a great test. Take a moment and give me your best answer to this question: Suppose you’re putting $1,000 a year into an index fund for five years. Which of these two indexes do you think would be better for you? Example 1 • The index stays at $100 per share for the first year. • It goes down to $60 the next year. • It stays at $60 the third year. • Then in the fourth year, it shoots up to $140. • In the fifth year, it ends up at $100, the same place where you started. Example 2 • The market is at $100 the first year. • $110 the second year. • $120 the third. • $130 the fourth, and • $140 the fifth year. So, which index do you think ends up making you the most money after five years? Your instincts might tell you that you’d do better in the second scenario, with steady gains, but you’d be wrong. You can actually make higher returns by investing regularly in a volatile stock market. Think about it for a moment: in example 1, by investing the same amount of dollars, you actually get to buy more shares when the index was cheaper at $60, so you owned more of the market when the price went back up! Here’s Burt Malkiel’s

is the

In 2014 actively run U.S. stock funds suffered $98 billion in redemptions, while index funds took in $167 billion. Passive managers have 38 percent of the $8.7 trillion stock fund business, more than twice their share 10 years earlier,

Fund management is a skill—you cannot run money through consultants or committees. If you have a committee, you should buy an index fund and stop trying. Committees settle to the lowest common denominator, which is the lowest risk. A committee will not take risk. By the time a committee decides to buy tech, it is already March 2000. Fund management is like cooking, whereby 10 chefs have the same ingredients but make 10 different things. You have great chefs who get three stars and lousy chefs who make horrible food. Fund management is similar in that what is important is what you make out of the mix, how you interpret information, how you structure trades and build portfolios. But with committees somehow the results are always the same. When you have a committee, you cannot be the only guy making the decision because, at some stage, you will be wrong in the short-term and everyone will get fired. So the whole groupthink model makes things very difficult, as does the visibility of these posts. Making or losing a lot of money always makes headlines—there is no upside or solution for that.

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” —Charles Darwin

Jill buys an index mutual fund that tracks the overall stock market, never touching her money and earning the same return as the overall stock market. Average Joe "tinkers" with his portfolio, purchasing some mutual funds through his financial advisor and investing in stocks whenever he gets a particularly juicy tip from his neighbor. Joe earns the same return as the average investor in the stock market.

They found they could have made a tidy paper profit in the following six-month period, on average, 12.01 percent a year above what a simple, market-following index fund would have earned them. But beyond six months, the picture changed: After two years, their paper profits vanished as the stock prices "corrected" themselves.

People who buy equity ETF shares in taxable accounts, such as a joint account or trust account, will find their tax bill may be slightly lower at the end of the year than if they had purchased the same amount in a comparable open-end index fund.

In addition to lower expense ratios on ETFs, Vanguard charges purchase and redemption fees on several open-end funds. There are no extra fees on Vanguard ETFs although there is a brokerage commission cost to buy and sell shares.

Index funds generally buy and hold all the securities within a particular index in a market cap—weighted fashion. Thus while an S&P 500 Index fund would own all five hundred stocks that comprise the index, it would not own an equal amount of each of the five hundred stocks. The largest holding might, for example, be 5 percent of the entire portfolio. There

Rather than attempt to time the market or pick individual stocks, it is more productive to invest and stay invested. As Warren Buffett said: “We continue to make more money when snoring than when active.” Mr. Buffett also said: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after expenses and fees) delivered by the great majority of investment professionals.

Tilt your portfolio toward value by buying passive indexed portfolios of value stocks or, fundamentally weighted index funds. Chapter

And if you don’t believe me or even Charley, remember that Warren Buffett, perhaps the greatest investor of our time, has opined that all investors would be better off if their portfolio contained a diversified group of index funds.

Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.”1 —Warren Buffett, chairman of Berkshire Hathaway

Owning the U.S. “market” means the whole shooting match—the Wilshire 5000. The granddaddy of all “total-market” funds is the Vanguard Total Stock Market Index Fund. With rock-bottom expenses of 0.20%, it is a superb choice. Since its inception in 1992, it has done an excellent job of tracking the Wilshire 5000,

First, a total-market index fund is an ideal “core” equity holding in a taxable account, because of its “tax efficiency.” The Russell 3000 and the Wilshire 5000 have essentially no turnover. Stocks may leave the index via mergers and acquisitions, but these are often not taxable events. The only way a stock truly leaves these portfolios is feet first, by going bankrupt, in which case you don’t have to worry about capital gains.

Since most investment managers will not beat the market, investors should at least consider investing in “index funds” that replicate the market and so never get beaten by the market. Indexing may not be fun or exciting, but it works. The data from the performance measurement firms show that index funds have outperformed most investment managers over long periods of time. For

For a simple, hands-free investment experience, invest in lifecycle mutual funds. Choose a low-cost, target-date fund like Vanguard Target Retirement 2050 Fund. Avoid actively managed mutual funds; these funds rarely beat the market. Not only that, but high fees will eat into your investment returns over a long period of time. You are better off choosing a low-cost index fund as described above.

Because cash transfers is such a simple program, and because the evidence in favor of them is so robust, we could think about them as like the “index fund” of giving. Money invested in an index fund grows (or shrinks) at the same rate as the stock market; investing in an index fund is the lowest-fee way to invest in stocks. Actively managed mutual funds, in contrast, take higher management fees, and it’s only worth investing in one if that fund manages to beat the market by a big enough margin that the additional returns on investment are greater than the additional management costs. In the same way, one might think, it’s only worth it to donate to charitable programs rather than simply transfer cash directly to the poor if the other programs provide a benefit great enough to outweigh the additional costs incurred in implementing them. In other words, we should only assume we’re in a better position to help the poor than they are to help themselves if we have some particularly compelling reason for thinking so.

Whiting, Fred L., Roswell Revisited. 1990, Fund for UFO Research, POB 277, Mt. Rainier, MD 20712 Send SASE for free summary and list of publications. Stringfield, Leonard, Roswell and X-15: UFO Basics, MUFON Journal, #259, Nov. 1989, pp. 3-7. Friedman, S.T., 1991 Update on Crashed Saucers. MUFON Conference Proceedings, July 1991, Chicago, IL. Available from MUFON, 103 Oldtowne Road, Seguin, TX 78155. Send SASE for info. O'Brien, Mike, Springfield, MO, News Leader, Sunday, Dec. 9, 1990, pp. F 1-4. Randle, Kevin and Schmitt, Donald, UFO Crash at Roswell. Avon, NY, (pb), July 1991. Friedman, S.T., MJ 12 articles in International UFO Reporter, Sept./Oct. 1987, pp. 13-10; Jan./Feb. 1988, pp. 20-24; May/June 1988, pp. 12-17; March/April 1990, pp. 13-16; MUFON J. 9/89. p. 16, MUFON Conf. Proc. 1989. Friedman, S.T., Flying Saucers, Noisy Negativists and Truth, MUFON Conf. 1985, UFORI, see item #3. Keel, John, FATE, March 1990, January 1991. Weiner, Tim. Blank Check: The Pentagon's Black Budget, Warner Books, 1990, p. 273. Extremely well referenced, researched and indexed. Copyright, 1991. Stanton T. Friedman COMMENT Stanton Friedman, a true blue scientist, lets it be known that he seeks only bottom-line, verifiable information from his sources -- names of witnesses, place names, dates, old records -- anything evidential that would convince a hard-nosed skeptic. If

It is simply not worth paying anybody more than 1 percent to manage your money. Above $1 million, you should be paying no more than 0.75 percent, and above $5 million, no more than 0.5 percent. . . . Your adviser should use index/passive stock funds wherever possible. If

Does achieving extremely broad diversification seem completely out of reach for ordinary investors? Fear not. There are broadly invested, very low-cost funds that can provide one-stop shopping solutions. We will recommend a broadly diversified United States total stock market index fund that includes real estate companies and commodity producers, including gold miners. We

Similarly, the buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve her long-term investment goals.

For Smith, prudence covers everything in your personal bearing, the “wise and judicious care” of your health, your money, and your reputation. So the modern prudent man doesn’t smoke. He’s physically active and keeps his weight under control. He works hard and avoids debt. He stays away from get-rich-quick schemes. I would suggest that he prefers indexed mutual funds to managed funds and stock picking. In short, he foregoes the potential of a large upside to avoid the downside. But

As an investor, you have one powerful way to keep from getting distressed by devilish Mr. Market: Ignore him. Just buy and hold one of the broad-based index funds that

What does diversification mean in practice? It means that when you invest in the stock market, you want a broadly diversified portfolio holding hundreds of stocks. For people of modest means, and even quite wealthy people, the way to accomplish that is to buy one or more low-cost equity index mutual funds. The fund pools the money from thousands of investors and buys a portfolio of hundreds of individual common stocks. The mutual fund collects all the dividends, does all the accounting, and lets mutual fund owners reinvest all cash distributions in more shares of the fund if they so wish.

The overwhelmingly large number of investors should seek membership in the passive management club. This group, instead of scratching for a small edge in today’s extraordinarily efficient markets, wisely accepts what the markets deliver. Charley makes a compelling case for the market-matching strategy of investing in index funds, touting their simplicity, transparency, low cost, tax efficiency, and superior returns. Winning

Tax-efficient index funds garner a substantial edge over tax-inefficient actively managed mutual funds.

To overcome the drag of expenses and taxes, an actively managed fund would have to outperform the market by 4.3 percentage points per year just to break even with index funds.* The odds that you can find an actively managed mutual fund that will perform that much better than an index fund are virtually zero.

Index funds outperform approximately 80 percent of all actively managed funds over long periods of time. They do so for one simple reason: rock-bottom costs. In a random market, we don't know what future returns will be. However, we do know that an investor who keeps his or her costs low will earn a higher return than one who does not. That's the indexer's edge.

William Bernstein, Ph.D., M.D., author of The Four Pillars of Investing, frequent guest columnist for Morningstar and often quoted in The Wall Street Journal: "An index fund dooms you to mediocrity? Absolutely not: It virtually guarantees you superior performance.

Paul Farrell, columnist for CBS Marketwatch and author of The Lazy Person's Guide to Investing: "So much attention is paid to which funds are at the head of the pack today that most people lose sight of the fact that, over longer time periods, index funds beat the vast majority of their actively managed peers.

Paul Samuelson, first American to win the Nobel Prize in Economic Science: "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.

Jason Zweig, senior writer and columnist at Money magazine and coauthor of the revised edition of Benjamin Graham's classic, The Intelligent Investor: "If you buy-and then hold-a total stock market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run. Graham praised index funds as the best choice for individual investors, as does Warren Buffett.

The first concerns how an investor should choose among different types of broad-based index funds. The best-known of the broad stock market mutual funds and ETFs in the United States track the S&P 500 index of the largest stocks. We prefer using a broader index that includes more smaller-company stocks, such as the Russell 3000 index or the Dow-Wilshire 5000 index. Funds that track these broader indexes are often referred to as “total stock market” index funds. More than 80 years of stock market history confirm that portfolios of smaller stocks have produced a higher rate of return than the return of the S&P 500 large-company index. While smaller companies are undoubtedly less stable and riskier than large firms, they are likely—on average—to produce somewhat higher future returns. Total stock market index funds are the better way for investors to benefit from the long-run growth of economic activity.

Driving the move is a focus by Beijing on the Internet and innovation-driven sectors to boost slowing growth by easing listing rules. Another factor is a stock rally that has seen the Shanghai Composite Index climb 43% this year, although it fell 6.5% on Thursday. Meanwhile, Chinese investors are pouring money into funds that target startups. In 2014, 39 angel investment funds were set up in China, raising $1.07 billion, a 143% increase from the previous high in 2012, according to investment database pedata.cn, which is run by Zero2IPO Research in Beijing. Angel investors typically provide personal funds to finance small startups. High valuations and the loosening of listing rules will draw more Chinese companies to their home market, said Jianbin Gao of PricewaterhouseCoopers in China. “We anticipate significant growth in technology listings on domestic exchanges,” he said.

I believe that the Total Stock Market Index Fund should be the investment of choice for most investors, covering as it does the entire U.S. stock market, and

It is fair to say that, by Graham’s demanding standards, the overwhelming majority of today’s mutual funds, largely because of their high costs and speculative behavior, have failed to live up to their promise. As a result, a new type of fund—the index fund—is now gradually moving toward ascendancy. Why? Both because of what it does—providing the broadest possible diversification—and because of what it doesn’t do—neither assessing high costs nor engaging in high turnover. These

I’m speaking here about the classic index fund, one that is broadly diversified, holding all (or almost all) of its share of the $15 trillion capitalization of the U.S. stock market, operating with minimal expenses and without advisory fees, with tiny portfolio turnover, and with high tax efficiency. The index fund simply owns corporate America, buying an interest in each stock in the stock market in proportion to its market capitalization and then holding it forever.

Experience conclusively shows that index-fund buyers are likely to obtain results exceeding those of the typical fund manager, whose large advisory fees and substantial portfolio turnover tend to reduce investment yields. Many people will find the guarantee of playing the stock-market game at par every round a very attractive one. The index fund is a sensible, serviceable method for obtaining the market’s rate of return with absolutely no effort and minimal expense.

Investors who followed a broadly diversified asset allocation that included a total market fund and a small value index fund would have faired very well during the past decade.

Mixing a broad index fund with small-cap value has produced the best results. U.S. equities are a core position in almost every growth investor’s portfolio.

When you have identified your long-term objectives, defined your tolerance for risk, and carefully selected an index fund or a small number of actively managed funds that meet your goals, stay the course. Hold tight. Complicating the investment process merely clutters the mind, too often bringing emotion into a financial plan that cries out for rationality. I am absolutely persuaded that investors’ emotions, such as greed and fear, exuberance and hope—if translated into rash actions—can be every bit as destructive to investment performance as inferior market returns. To reiterate what the estimable Mr. Buffett said earlier: “Inactivity strikes us as intelligent behavior.” Never forget it.

But it is the long-term merits of the index fund—broad diversification, weightings paralleling those of the stocks that comprise the market, minimal portfolio turnover, and low cost—that commend it to wise investors. Consider these words from perhaps the wisest investor of all, Warren E. Buffett, from the 1996 Annual Report of Berkshire Hathaway Corporation: Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Another huge toll has been taken by taxes. Passively managed index funds are tax-efficient, given the low turnover implicit in the structure of the Standard & Poor’s 500 Index (and, to an even greater extent, the all-market Wilshire 5000 Index).

Q. Some of the index fund providers today are charging operating expenses considerably higher than, say, Vanguard ever has. In fact, some are charging more than even active funds! Is there a limit to what one should ever pay for an index product? What should that limit be? A. I would draw the line at 0.20 percent in yearly operating expenses for a broad-market index fund. There's not much reason to pay more than that, and some broad-market index funds charge a lot more. A firm like Morgan Stanley, for example, charges what the traffic will bear, getting away with murder, and their investors are losing greatly in the process. [Author's note: The Morgan Stanley S&P 500 Index fund, A class (SPIAX), charges a front load (commission) of 5.25 percent, a net expense ratio of 0.64 percent, and a 12b-1 fee (ongoing marketing fee) of 0.24 percent.] It's absurd. The whole success of indexing depends on low cost. And there's no reason to charge a lot of money for an index fund, as the fund requires no management. In the case of international developed-world funds, I'd draw the line at 0.30 percent. And in the case of emerging markets, I wouldn't pay more than 0.40 percent. That's not to say that costs should be your only consideration in choosing an index fund — you also want a fund issued by a solid company with good people at the helm — but costs should always be paramount.

By buying a share in a “total market” index fund, you acquire an ownership share in all the major businesses in the economy. Index funds eliminate the anxiety and expense of trying to predict which individual stocks, bonds, or mutual funds will beat the market.

This simple investment strategy—indexing—has outperformed all but a handful of the thousands of equity and bond funds that are sold to the public. But you wouldn’t know this when Wall Street throws everything but the kitchen sink at you to convince you otherwise. This is the plan we use ourselves for our retirement funds, and this is the plan we urge you to follow, too.

We have believed for many years that investors will be much better off bowing to the wisdom of the market and investing in low-cost, broad-based index funds, which simply buy and hold all the stocks in the market as a whole. As more and more evidence accumulates, we have become more convinced than ever of the effectiveness of index funds. Over 10-year periods, broad stock market index funds have regularly outperformed two-thirds or more of the actively managed mutual funds.

The average actively managed mutual fund charges about one percentage point of assets each year for managing the portfolio. It is the expenses charged by professional “active” managers that drag their return well below that of the market as a whole. Low-cost index funds charge only one-tenth as much for portfolio management. Index funds do not need to hire highly paid security analysts to travel around the world in a vain attempt to find “undervalued” securities. In

A major advantage of indexing is that index funds are tax efficient. Actively managed funds can create large tax liabilities if you hold them outside your tax-advantaged retirement plans. To the extent that your funds generate capital gains from their portfolio turnover, this active trading creates taxable income for you. And short-term capital gains are taxed at ordinary income tax rates that can go well over 50 percent when state income taxes are considered. Index funds, in contrast, are long-term buy-and-hold investors and typically do not generate significant capital gains or taxable income. To

With no-load index funds, no transaction fees are levied on contributions. Moreover, mutual funds will automatically reinvest all dividends back into the fund whereas additional transactions could be required to reinvest ETF dividends. We recommend that individuals making periodic contributions to a retirement plan use low-cost indexed mutual funds rather than ETFs.

Some public pension plans are responding to the continued disappointing returns. The California Public Sector Retirement System (CalPERS) is often regarded as a thought leader among other pension funds, and with over $300 billion in assets it is one of the largest institutional investors in the world. In September 2014 it announced (CalPERS 2014) the elimination of hedge funds from its portfolio, concluding that the cost of investing wasn't justified by the returns. One interesting disclosure was that in the most recent fiscal year through June 2014, CalPERS had paid $135 million in fees on a $4 billion portfolio that earned 7.1%. The approximately $280 million in investment returns ($4 billion × 7.1%) means that for every $2 in returns, it paid away a third dollar in fees. Of the gross returns (i.e., before fees), two-thirds went to CalPERS and one-third to the hedge fund managers. When you consider that it's possible to invest in equity index funds for less than 0.1%, this division of investment profits between the provider of capital and the managers must have appeared as absurd to CalPERS as it does to everyone else.

A portfolio of low-cost index funds is the best approach for a percentage of your investments because we don’t know what stocks will be “best” going forward.

Invest most or all of your money in index funds. Keep your costs of investing and taxes low.

A Fortune magazine writer once said, “By day, we write about, ‘Six Funds to Buy NOW!’. . . By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don’t sell magazines.

Over an investment lifetime, it’s a virtual certainty that a portfolio of index funds will beat a portfolio of actively managed mutual funds, after all expenses. But over a one-, three-, or even a five-year period, there’s always a chance that a person’s actively managed funds will outperform the indexes.

Your index fund should not be your manager’s cash cow. It should be your own cash cow.