Index
Investing A Long-Term Affair
by Andrew Leckey
Successful Investing
Being just average appeals to many investors.
Low-cost index funds, which simply seek to mirror the performance
of a given stock index, turned average into great success in
recent years. It's just that 2001 doesn't happen to be one of
those years.
Index funds looked like a much smarter choice than actively
managed funds during periods such as the 1990s when the entire
market was moving upward.
They aren't nearly as chic in years such as this one when market
indexes are sagging.
For example, investors who'd given their full allegiance to
the Standard & Poor's 500 index are shell-shocked this year.
They're left wondering whether an active portfolio manager would
have been able to discern the better stock bets.
Yet whatever the market, index funds remain a smart idea that's
with us to stay. They've proven themselves time and again, beating
the results of nearly 80 percent of actively managed large- and
small-cap stock funds in the long run. And it's the long run
that counts.
The best-performing stock index funds over the past 10 years
when big stocks dominated, according to IndexFunds.com, have
been:
Vanguard 500 Index (VFINX); $81 billion in assets; "no-load"
(no sales charge); $3,000 minimum initial investment; 800-662-7447;
average annualized return of 17.35 percent.
Fidelity Spartan 500 Index (FSMKX); $9 billion; no load; $10,000
minimum; 800-544-8888; annualized return of 17.16 percent.
T. Rowe Price Equity Index 500 (PREIX); $4 billion; no load;
$2,500 minimum; 800-638-5660; annualized return of 16.99.
Vanguard 500 Index has an annual expense ratio of 0.18 percent;
Fidelity Spartan 500 Index, 0.19 percent; and T. Rowe Price Equity
Index 500, 0.40 percent.
"Other things being equal, the expense ratio dictates how
well a fund tracks an index, with the lower the expense ratio,
the higher the return," explained Daniel Wiener, editor
of the Independent Adviser for Vanguard Investors (www.adviseronline.com),
7811 Montrose Rd., Potomac, MD 20854.
"But there are now so many different indexes that index
investing has become more complicated than it was when the emphasis
was on only the S&P 500 or Wilshire 5000."
Thirty years ago, Wells Fargo launched the first equal-weighted
New York Stock Exchange portfolio for the Samsonite pension plan.
Twenty-five years ago, the Vanguard 500 Index Fund was born.
The idea took hold. There are now 160 stock index funds available
in two dozen investment categories.
An index fund's return is the performance of the index, minus
expenses to run the fund. The investor must always consider that
annual expense ratio, how closely the fund actually follows the
index and how tax efficient the fund is.
In some cases, futures and other investments are used to maximize performance. Keep in mind that funds using futures or parking their cash in bonds can generate income that will increase the taxes that the investor must pay.
"The top index funds, such as the Vanguard 500 Index Fund, have outperformed the index historically by timing their trades, using a little active management and employing futures to leverage themselves," explained Jim Wiandt, editor for San Francisco-based IndexFunds.com, a resource for index investing. "Theoretically, if they just tracked the index, such marginally better performance would be impossible."
Understand the differences in indexes, for they'll perform differently in various types of markets.
"Up until last year, everyone seemed to think that S&P 500 funds were unbeatable, but when large-cap stock tanked, they followed suit," pointed out Peter Dei Teresa, senior analyst with the Morningstar Mutual Funds investment advisory in Chicago. "There was a boom in the introduction of new index funds during the bull market, but it trailed off considerably and won't return until we see strong returns in the indexes again."
Major index categories and the best-performing fund in each during 2001, according to IndexFunds.com, have been:
Small-cap stocks (CRSP Cap-based Portfolio 10 Index): Bridgeway Ultra-Small Index (BRSIX); $5 million; no-load; $2,000 minimum; 800-661-3550; up 2.18 percent.
Small-cap value stocks (S&P Small Cap 600/BARRA Value Index): Vanguard Small Cap Value Index (VISVX); $471 million; no-load; $3,000 minimum; 800-662-7447; down 5.39 percent.
Dow Jones industrial average: Orbitex Focus 30 "A" (OFTAX); $990,000; 5.75 percent load; $2,500 minimum; 888-672-4839; down 6.40 percent.
Mid-cap stocks (S&P MidCap 400 Index): California Investment S&P MidCap Index (SPMIX); $70 million; no-load; $5,000 minimum; 800-225-8778; down 10.67 percent.
Standard & Poor's 500 Index: Scudder Select 500 S (SSFFX); $34 million; no-load; $2,500 minimum; 800-225-2470; down 11.42 percent.
Total stock market (Wilshire 5000): Fidelity Spartan Total Market Index (FSTMX); $937 million in assets; no load; $15,000 minimum; 800-544-8888; down 12.3 percent.
"We use both indexing and active managers for our clients so we get diversification," said Roy Dilberto, Chairman of RTD Financial advisors in Philadelphia. "We like index funds because they're sure to follow the marketplace and are tax efficient."
Editor's Note: Andrew Leckey's column, Successful Investing appears on a regular basis in the print edition of the Bull & Bear Financial Report. Mr. Leckey's latest book, The Lack of Money is the Root of All Evil Mark Twain's Timeless Wisdom On Money, Wealth and Investing is now available wherever books are sold.
