Tag Archives: index investing


Is Indexing Worse Than Marxism?

Index funds have always been ridiculed by active mutual-fund managers.  Two recent events have fueled a new set of criticisms.  The mid-year 2016 Standard and Poor’s report on index fund performance showed that the superiority of low-cost indexing, whether in the form of mutual funds or exchange-traded funds (ETFs), has increased over time.  Over the preceding five and ten-year periods, index funds outperformed over 80 percent of their active peers.  It has become increasingly untenable to claim that passive index investing produces mediocre results.  The second related event is that investors have increasingly taken note.  Money has been pouring out of active mutual funds and into passively-managed index funds.   Last year investors pulled over $200 billion out of actively-managed […]

The Right Way and the Wrong Way to Benchmark a Diversified Portfolio

One of the biggest challenges for an investor is to determine how well her diversified portfolio is performing. The two most common benchmarks featured in published advice are: S&P 500 A 60/40 Stock/Bond portfolio Unfortunately, most published advice is incorrect. That’s because it usually encourages comparison to an irrelevant index or too generic of a model portfolio. In our opinion, the right way to benchmark a diversified portfolio is to take into account risk and taxes. Let’s Start with Indexes Most individual investors think they should benchmark their diversified portfolios against a stock index like the S&P 500®. That’s probably because such indexes are the only indexes with which they are familiar or the only indexes their financial advisors used in […]

The Stock-Pickers’ Market Myth

Earlier this month, Barron’s ran a cover story that made the case that 2015 was likely to be a “stock pickers’ market.” Active portfolio managers were expected to “recapture their lost glory” as interest rates were predicted to rise. Unfortunately, we have heard similar claims at the start of every year. In early 2014 The Wall Street Journal ran an article predicting that 2014 would be a stock pickers’ market as the correlation between the S&P 500® index and its component stocks was declining. Indeed, in every year one can find similar predictions for the year ahead. Money managers have a number of clichés they use to promote their high-priced services, and “stock pickers’ market” is one of their favorites. […]

Has Indexing Become Too Popular?

Indexed investment strategies (passively holding portfolios that simply buy and hold all the securities in a particular market) continue to increase in popularity. Currently more than 35% of investment portfolios use index funds to gain exposure to the U.S. stock market.1 And according to Morningstar Investment Research, more than 55% of the moneys invested in equity mutual funds during 2014 went into index funds — rather than actively-managed funds. Given this success, people often ask whether index funds have become too popular. Could we be entering a period when active portfolio management will become more advantageous? And could the very size of index funds interfere with their ability to produce exceptional results? My answer to both questions is a clear […]

Direct Indexing: The Next Generation of Index Investing

One year ago today, Wealthfront became the first and only automated investment service to offer direct indexing with the Wealthfront 500. Direct indexing allows you to own all the stocks that comprise a major index in your own brokerage account, which is far more tax efficient than owning the equivalent index fund. Our research indicated this could generate an incremental annual after-tax return of 2.46% over just owning the S&P 500®. Frankly, we were overwhelmed by the amount of positive feedback from both clients and industry experts. It has been only one year since the launch of the Wealthfront 500, and already over $500 million has been invested in Wealthfront 500 accounts. We thought we were launching a product, but it […]

Indexing and the Curious Case of Alibaba ($BABA)

It has now been 40 years since I published the first edition of A Random Walk Down Wall Street. The book, about to come out in its 11th edition, had a very simple message: Investors would be better off buying a broad-based index fund that simply held all the stocks in the market. As a result, it might surprise some to hear that not all index funds will serve investors well. Not all index funds are the same, and it is important to understand how indexes are constructed and what stocks they contain. The recent Initial Public Offering of Alibaba stock, the biggest IPO in history, and the failure of many indexes to consider including it, underscores how important it […]

Indexing and the 2014 “Stock-Picker’s” Market

In January of this year it was widely believed 2014 would be a “stock-picker’s” market. While the S&P 500® index of large U.S. stocks produced an extremely generous return of more than 30% in 2013, an indexing strategy was deemed unlikely to be effective in 2014 — or so active managers argued in an attempt to justify their high fees. While several months remain we can still take a preliminary look at the results. The stock market was not quite as favorable this year as it was last year. The S&P 500 produced a rate of return of only  about 7% during the first six months of 2014. But did active managers finally demonstrate their superior skills? The answer is […]

The Benefits of Diversification

We’ve been gratified by the feedback we’ve received on our recent post Why You Shouldn’t Just Invest In The S&P 500. However some of our readers are still grappling with the question of why a broadly diversified portfolio is better than a portfolio that includes only one asset class. To make the point clearer, we decided to do a follow-up post with more data and ways to visualize the value of diversification.  We have also updated our previous post to include the graphics introduced in this post. […]