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Makin' Money

Index creators run wild

Chris Farrell Feb 10, 2011

Over the past three decades, investing in equity indexes moved from the margins of Wall Street to a mainstay investment on Main Street. The business of creating index investments has been staid, a high-brow world full of quant jocks and cerebral academics. Nobel laureate William Sharpe has called indexing “a dull, boring way to be a better investor than many of your friends.”

Well, you can forget dull and boring. The first equity index fund open to individual investors was the Vanguard 500 Index Fund launched in 1976. There are now 325 index mutual funds and 1,053 index-tracking exchange-traded funds, according to Money Magazine. It seems that more are created every week, created by mad scientists gone wild.

Now, if you’re willing to slog through the choices you can tailer an indexed portfolio that truly reflects your investment desires. Still, far too many of these index products–especially the ETFs–are based on narrow indexes, are designed to be volatile, and are expensive to own. Many of these products are really speculative bets, everything indexing isn’t supposed to be for individual investors.

But here’s the good news. The article points out that the broad-based traditional index funds–if you can use the word “traditional” for a product only a few decades old–have never been cheaper. I’d stick with the indexing fundamentals.

So if you think there’s nothing wrong with good old-fashioned indexing, all you have to do is stick with a portfolio that’s as easy as one, two, three — that is, one total U.S. stock market fund, a total international stock fund, and a total bond portfolio. The cost can be less than $20 per $10,000 invested.

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