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.
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Is this another example of the wisdom of crowds and the power of the average? I’m thinking of the studies showing that many faces of varying levels of attractiveness morphed together tend to be judged as very attractive, and of the way contestants on Who Wants to be a Millionaire? can do very well by polling the audience for the right answer.
Surowiecki’s book (I’ve linked to the Wikipedia page on it) is absolutely fascinating. Read it and Macolm Gladwell’s Blink to get yourself thoroughly confused on whether you should trust your gut or trust the mob. *g*
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Thanks for this link. It looks like it could be quite useful as I start investing this fall!
One downside of their blog is its lack of RSS feed! I’ll still check it out, but it’ll mean being more mindful of finding new posts.
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I went with a Dave Ramsey endorsed local provider when it was time to roll out my 401K to an IRA when I left the company I was working for. I’m quite pleased with that account – the funds have an average returns history of 11% after the management fee. The way I set up the account though, they charge a 7% fee when it is opened and no ongoing fee.
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Well it doesn’t have to be boring, even for mutual fund investments. I’m 70% invested in various Fidelity emerging market funds, mostly in Southeast Asia. I’m up significantly this year and foresee much more growth in the coming years. I don’t day trade but invest actively. I do my own research and I find the upside quite exciting!
-Raymond
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Index funds are probably the best bet for most people who don’t want to actively research and pay attention to their investing. In my research, however, I’ve found several very good managed mutual funds that, even after fees, have consistently outperformed the market.
The downside, of course, is that many have minimum initial purchases of $3,000-5,000 which puts off many casual investors.
That site that you linked to seems to offer excellent advice for the casual investor and I’m glad you linked to it. Everything I’ve read on that site so far (I’ve perused a large part of it) has been not only easy to read but also just good advice.
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Here’s the PDF document that changed my life.
IFA 12 Step Guide to Investing
Goes deep, DEEP into the history of index funds, the stock market, and lays out a pretty solid case for why index funds work so well.
It’s also really fun/good to read, solid, good for a casual investor, and has pictures/quotes/sayings/research from many philosophers, scientists, stock market gurus, etc
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We want Dave! We want Dave!
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jtimberman noted he paid a 7% fee when opening his account and no ongoing fees.
In general, I can see the value of reducing ongoing expenditures, but even so, 7% is pretty high. I pay a .02% management fee on my Vanguard index funds.
Returns? A rolled-over IRA is in Vanguard’s Balanced Index fund and has averaged a 9.7% annual return over the past 5 years. I’ve also had the Small-Cap Value Index for 5 years, and it’s averaged a 15.5% return.
I agree that an index fund isn’t always preferable – I wouldn’t want one that charged high (2%) fees, for example. And a Morningstar account can really help with research.
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A lot of peolpe don´t know the difference between investing and speculating.
Mark Twain said; There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.
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My father in law is always harping on me to only invest in things that have low or no fees. This article helped me understand why he is so adament about not paying fees.
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Thank you for posting this. I needed something about investing that doesn’t make my eyes roll back in my head.
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