Assuming that the future is like the past, you can outperform 80 percent of your fellow investors over the next several decades by investing in an index fund-and doing nothing else. But acquire the discipline to do something even better: become a long-term index fund investor.
Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.
Index funds have regularly produced rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a while and therefore they must, on average, underperform the indexes by the amount of these expense and transaction costs disadvantages.
Most investors, both institutional and individual, will find that the best way to own common stocks (shares') is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.
The key aspect of an index fund is that many of them, not all of them, but many of them are extremely cheap.
I was involved with Wells Fargo Bank as a consultant in the late 1960s and early 1970s, when I suggested to them that they develop a product that has become known as index funds.
The simple index fund solution has been adopted as a cornerstone of investment strategy for many of the nation's pension plans operated by our giant corporations and state and local governments. Indexing is also the predominant strategy for the largest of them all, the retirement plan for federal government employees, the Federal Thrift Savings Plan (TSP). The plan has been a remarkable success, and now holds some $173 billion of assets for the benefit of our public servants and members of armed services.
Nothing highlights better the continuing gap between rhetoric and substance in British financial services than the failure of providers here to emulate Jack Bogle's index fund success in the United States. Every professional in the City knows that index funds should be core building blocks in any long-term investor's portfolio. Since 1976, the Vanguard index funds has produced a compound annual return of 12 percent, better than three-quarters of its peer group.
... the best way to own common stocks is through an index fund.
An index fund is a fund that simply invests in all of the stocks in a market. So, for example, an index fund might invest in every single stock or almost every single stock in the U.S. market, it might invest in every single stock abroad, or it might invest in all of the bonds that are out there. And you can make a perfectly fine investing portfolio that mixes equal parts of all three of those.
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