More Reasons to Invest in Index Funds

US News gives us more reasons to invest in index funds as follows:

According to the just-released S&P Indices Versus Active Funds Scorecard for year-end 2008, the S&P 500 generated higher returns than 72 percent of actively managed large cap funds from the beginning of 2004 to the end of 2008.

Results were even worse for active managers in other major asset classes. Over that five-year period, the S&P MidCap 400 beat 79 percent of mid cap funds, and the S&P SmallCap 600 beat a whopping 86 percent of small cap funds. S&P found similar results in actively managed non-U.S. stock funds and in the majority of actively managed bond funds.

You might wonder if bear markets like this one sway the results. S&P says no: "The belief that bear markets favor active management is a myth. A majority of active funds in each of the nine domestic equity style boxes were outperformed by indexes in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes."

A few thoughts from me:

1. As you know, I love index funds.

2. I've set up my index funds to save me as much money as possible (and thus maximize my returns.)

3. So much for the "index funds perform poorly in a bear market" comments I hear often, huh?

4. I've continued to invest in index funds (mostly stocks, but some bonds) throughout the stock market's fall and I'm counting on the fact that they'll do quite well when the rebound occurs.

If you want to read more about index funds, check out these posts:

• An Investment Portfolio Using Only Three Index Funds

• Warren Buffett Tells How to Invest $1 Million

• Warren Buffett Bets on Index Funds

Comments

[SaveBuyLive]

Index funds definitely perform poorly in a bear market. They just perform a bit less poorly than everything else. I'll take a 30% loss over a 40% or 50% loss any day.

I'm not entirely convinced that you should just get your index funds and then sleep on them if the market is sending signals telling you to run for cover. On the other hand I'm also convinced that most attempts at market timing just don't work.

My current belief is that index funds + regular rebalancing = win (or at least the lowest possible loss in a recession for the average investor).

[Greg Retzloff]

For some concrete figures that demonstrate the index fund edge, see the post, "Vanguard Index Funds Beat Their Category Averages" http://justforfunds.blogspot.com/2009/04/vanguard-index-funds-beat-their.html

[Dave]

Index funds perform poorly in bear markets. Last year I was in 100% cash nearly most of the year and I saved myself from 40% losses I would have suffered had I been in an S&P index fund! I'm now 50% back in index funds and my portfolio is up over 10% over the past month!

BTW, how did index funds do compared to ACTIVELY managed INVERSE funds last year? Not well!!

IMO - When you try to make the claim that index funds DON'T perform badly in bear markets just because they happen to do better than actively managed funds, you are really doing your readers a major disservice. Of course there are FAR more places to invest than simply index and active funds. There's bonds, commodities, SHORT funds, and cash, among others.

[Samson Smith]

thanks for sharing such great post, according to me though they don’t give you whooping returns, over a period of time they grow steadily to give you good returns.

[Young Investor]

I would reason that one of the best reasons to invest in an index fund is quite simply because it requires less time and homework than individual holdings do. This is perfect for anyone who has a busy lifestyle that cannot afford to be reading too many financial reports and watching daily tickers.