Index funds are boring. They’re not sexy. No one gets excited when your hot stock tip is to buy the Vanguard Total Stock Market Fund (VTSMX). Yet indexed mutual funds are the best choice for most investors.
Last January I shared a story about the best investment advice you’ll never get written by Mark Dowie of San Francisco magazine. Dowie’s piece explored the rise of index funds, and the reasons traditional brokers are reluctant to mention them to their clients. During his research, Dowie met with a small financial management firm called the Aperio Group, which champions index fund investing.
Because of this article, Aperio received a flood of requests for advice, advice they weren’t prepared to give. Instead, the company created a website called Transparent Investing:
Since Aperio isn’t seeking wealth management clients, Transparent Investing was born as a way to provide pro-consumer advice. Created by Patrick Geddes (Aperio’s Chief Investment Officer) this site aims to empower investors of all wealth levels to avoid getting duped by hidden fees and unjustified claims. Consider it a form of inoculation against the worst sales pitches in the investment industry!
The site offers:
- A simple 10-step introduction to investing, which gives a brief overview of setting goals, understanding risk, allocating assets, indexing, and more.
- A handful of video clips elaborating on these topics.
- And a blog “dedicated to the consumer who wants to avoid unnecessarily lining the pockets of financial advisors or brokers.”
In the following sample video, Geddes points out that index funds have a huge head start over managed mutual funds. By paying an advisor to recommend actively managed mutual funds, on average you pay 3.1% more than you would if you were to purchase index funds on your own. In other words, an actively managed fund would need to perform 3.1% better than the market in order for you to do as well as you would if you’d bought an index fund.
The most important feature at this site is the a free PDF called The Whole Story: A Guide to Transparent Investing [976kb], which contains 53 easy pages of investment advice. The document includes suggestions for do-it-yourself investors, as well as recommendations for those who prefer to hire a financial advisor.
[This document] describes a simple yet highly effective approach to investing available to almost anyone in the United States with assets to invest. This approach is already widely used by lots of smart individual investors and is even more widely used by institutions. The basic idea is to use index funds to construct simple portfolios that can help investors achieve their goals in the most cost-effective way.
[Indexing is] a deceptively simple solution exists that too rarely gets mentioned by investment advisors or brokers because the simple solution is great from the perspective of an investor but terrible from the perspective of an advisor. Indexing is a successful approach to investing not because it’s simple, but because it has performed so much better than the average active manager (the opposite of indexing), and the simplicity is just an added bonus.
This PDF is the meat of the site. This is what I want you to see. I encourage you to download it, and to make time to read it over the next few days. Reading this guide will put you far ahead of most individual investors. The hour you spend on this will pay huge dividends in the long run.