Taylor Larimore's Investment Gems (--> Wiki)

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Taylor Larimore's Investment Gems (--> Wiki)

Post by simba »

An expanded version of this page can be found on The Bogleheads Wiki.

Last edited by simba on Sun Feb 08, 2009 12:52 pm, edited 1 time in total.
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Taylor's Gems: On Indexing

Post by Barry Barnitz »

Here are 14 benefits of indexing plus a list testimonials from recognized investing experts:

1. Index funds (on average) have higher returns than managed funds. (play the odds).

2. Diversification: The increased diversification of index funds results in lower risk. Baer & Ginsler did a study of Standard Deviaton for actively managed funds vs. the total stock market over both 5 and 10-year periods. Their conclusion: "The returns of actively managed funds were 20 to 25% more volatile than the broad market."

3. Consistency: Vanguard's Total Stock Market Index Fund ranked among the top 25% of large-blend funds in just two of the past 10 years. Nevertheless, because of it's consistency, only twice falling below average, it outpaced 85% of all large-blend stocks after taxes.

4. Continuation: Of 355 actively managed equity mutual funds around in 1974, less than half survive today. Indexers do not have to worry that their fund will disappear.

5. No style drift: We know that asset allocation determines about 90% of portfolio performance. Managed fund allocations often change.

6. No overlap. It is almost inevitable that a portfolio of managed funds will have overlap. This is not a problem with index funds.

7. No manager changes: History tells us that the average manager leaves within five years. Index fund investors do not worry about manager changes.

8. No worry about underperforming a benchmark index: Many current best performing managed funds later seriously underperform (U.S. Growth, Magellan, Legg Mason Value Trust, etc.). It is much more important to avoid losses than to achieve extra gains.

9. No worry about "asset bloat" which often causes large successful funds to underperform (Magellan).

10. Less cash dilution. Index funds hold less cash than active funds.

11. Less worry that a manager has "lost his touch." Index funds are expected to return to profitability.

12. Tax-Efficiency: Index funds are significantly more tax-efficient than most managed funds. It is after-tax return that counts.

13. Low maintenance: Index funds are simple, predictible, and easy to understand, explain, and maintain.

14. Peace of mind: Indexers know the averages are always working for them. The index investor has much less worry and more free time to spend with family and other more enjoyable endeavors.

When I am undecided I listen to experts. For this reason, many years ago I started saving their ideas in brief quotes. To avoid more than one quote/expert, I made this new alphabetized list of what investing experts say about "indexing":

"In every asset class where they are available, Index! Four of five funds will fail to meet or beat an appropriate index." Frank Armstrong, author, financial adviser

"There can be no question that indexing for most categories of taxable investors and for most marketable conditions, will outperform conventional active management." Robert Arnott, CEO First Quadrant

"The surest way to make money in the stock market is not to work very hard at it. Don't try to outsmart the market; settle for matching it. Put most of your money in an index mutual fund." Gary Belsky, author

"Indexing virtually guarantees you superior performance. Bill Bernstein, author & financial adviser

"The closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by l.5 to 2 percentage points a year over a sustained period." Jack Bogle

"With an index fund--the certainty of keeping up with the market is a very worthwhile trade-off for the possibility of beating it." Jack Brennan, Vanguard CEO

"It's extremely difficult to beat the market." Peter Brimlow, Forbes senior editor

"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." Warren Buffet

"Searching through a list of 234 domestic equity funds that have survived for 20 years, only 31 did better than the Vanguard 500 Index. That means the odds are really, really poor that any of us will do better than a low-cost broad index fund." Scott Burns, syndicated columnist

"Four years ago I was a fan of index funds. Today I am a true believer." Jonathan Clements, senior writer, Wall Street Journal

"Indexing is a marvelous technique, I wasn't a true believer, I was just an ignoramus. Now I am a convert. Indexing is an extraordinarily sophisticated thing to do." Douglas Dial, former CREF portfolio manager.

"The best plan for most of us, is to commit to buying some index funds and do nothing else." Charles Ellis, author

"It is basically impossible to beat the market." Prof. Eugene Fama

"I was not always an obnoxious indexing zealot. Ten years of believing in and selling active management strategies in the brokerage industry made me this way." Rick Ferri,CFA, author & financial adviser

"Buy and hold. Diversify. Put your money in Index Funds." Justin Fox, Fortune senior writer

"If it weren't for noise, 98% of investors would see what's going on and buy passive strategies." Ken French, researcher

"Index funds save on management and marketing expenses, reduce transaction costs, defer capital-gain, and control risk--and in the process, beat the vast majority of actively manage mutual funds." Good & Hermansen, authors

"Active portfolio management thus tends to generate lower returns and higher taxes." John Haslem, author, "Mutual Funds: Risk and Performance Analysis"

"When you realize how few advisors have beaten the market over the last several decades, you may acquire the discipline to do something even better: Become a long-term index fund investor." Mark Hulbert

"I recommend that the long-term buy-and-hold portion of your equity portfolio be invested in equity mutual funds." Sheldon Jacobs, author

"They're just not going to do it (beat the market). It's just not going to happen. Daniel Kahneman, Nobel Laureate

"Beating an index is no piece of cake anywhere in the style box." Russell Kinnel, Morningstar director of fund research

"Simple buy-and-hold index investing is one of the best, most efficient ways to grow your money. Michael Lebouf, Ph.D., author

: It's amazing to me that, by one estimate, only 14% of money is indexed in this country!! What a shame." Lynn O'Shaughnessy, author

"The fund industry's dirty little secret: most actively managed funds never do as well as their benchmark." Arthur Levitt, Chairman, SEC

"Most investors would be better off in an index fund." Peter Lynch

"The message of this book (Random Walk Guide to Investing) is that over time you will beat the results from most professionally managed accounts by putting regular savings into an investment program using index funds." Professor Burton Malkel

"Most people should simply have index funds so they can keep their fees low and their taxes down." Jack Meyer, CEO, Harvard Management

"I am somewhat skeptical about anyone's ability to consistently beat the market." Moshe Milevsky, author

"With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me." Bill Miller, portfolio manager

"You're smart to look for an index fund, as index funds based on broad market indexes have trounced most stock mutual funds over long periods." Motley Fools

Indexing is for winners only. Jane Bryant Quinn, author, syndicated columnist

"We should just forget about choosing fund managers and settle for index funds to mimic the market." Pat Regnier, former Morningstar analyst.

"Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind." Ron Ross, author and adviser.

"Most investors should simply invest in index funds."
Robert Rubin, Secretary of the Treasury

"The most efficient way to diversify a stock portfolio is with a low fee index fund." Paul Samuelson, Nobel Laurete

The S&P index benchmarks outperformed their active peer funds in all nine Morningstar style boxes over the past ten years." Gus Sauter (1-25-05)

"Invest in a stock index mutual fund. What a brilliant, ingenious, common sense idea that I can't take credit for, but can religiously pass along to those of you who want to unclutter your financial lives and own a sophisticated portfolio." Bill Schultheis, author

"Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing." Charles Schwab

"You should switch all your investment in stocks to index funds as soon as possible, after giving proper consideration to any tax consequences." Chandan Sengupta, author.

"Because active and passive returns are equal before cost, and because active managers bear greater cost, it follows that the after-cost return from active management MUST be lower than that from passive management." Wm Sharpe, Nobel Laurete

"For most of us, trying to beat the market leads to disastrous results." Prof. Jeremy Siegel, author

"The media focuses on the temporarily winning active funds that score the more spectacular bull's eyes, not index funds that score every year and accumulate less flashy, but ultimately winning, scores." W. Scott Simon, author

"The only consistent superior performer is the market itself and the only way to capture the superior consistency is to invest in a properly diversified portfolio of index funds." Rex Sinquefield, researcher.

"The smartest thing people can do if they want money in the equities market is buy an index fund that is run for 30 basis points a year and forget about it." Elliot Spitzer, NY Attorney General

"Just save regularly and consistently in obvious choices like index funds." Ben Stein, author

"It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group." Robert Stovall, investment manager

"Choosing actively managed funds is the triumph of hope over reason and experience." Larry Swedroe. author, financial adviser.

"Sensible taxable investors reach an obvious conclusion: Invest in low-turnover, passively managed index funds." David Swensen, Yale endowment manager

"With a very simple and basic understanding of index funds, you can consistently beat 70% to 80% of all professionally managed index funds." Tweddell & Pierce, authors.

"Index funds are perhaps the most underrated stock funds in existence." Eric Tyson, author of "Mutual Funds for Dummies"

"We find that on average, active management reduces a portfolio's returns and increases its volatility compared with a static index." Vanguard study

"My strongest commitment in the mutual fund arena is to index funds." Richard Young, editor

"Over the long-term the superiority of indexing is a mathematical certainty." Jason Zweig, senior writer for "Money"

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Post by Lbill »

Thanks Simba - not only for the list of pubs, but for your wonderful backtesting spreadsheet, which is an invaluable tool IMO. I've read many of Taylor's favorites and anyone who is learning how to manage their own investment portfolio (and we all are) should consider going through that list and reading them all! You can save a lotta moola by using your local library, because just about all of these are important enough to be in the catalog. However, you will want to purchase many of them for your own personal library (they make a nice gift list for your birthdays too).
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs
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Post by stratton »

Put Taylor's gems in a fortune file.

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Post by cinghiale »


It looks like Taylor may have missed your posting, so I am going to steal his usual line: "Welcome to the forum!"

What a great first posting, to bring Taylor's Gems (and, as a bonus, Barry's indexing list and investment quotes) back onto the "active list." The books covered in Taylor's Gems deserve regular review, and I have now bookmarked the list for future use.

Thanks again for giving it a bump.

-- Cinghiale
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