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Index investing isn’t only approach, Vanguard says, but it’s best for most of us

Associated Press / May 11, 2011

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Vanguard is paying homage to its index investing roots, 35 years after launching the first index mutual fund.

A new section of Vanguard’s website features articles, research, and videos on index investing by top strategists at the nation’s largest fund company.

The broad message is this:

Most investors should choose index funds that simply ride the markets, rather than try to beat the market by paying an investment-picking pro.

Background
Index investors expect to match performance of the particular market segment a fund tracks, such as stocks in the Standard & Poor’s 500. Typically, these funds charge lower investment fees than managed funds levy, because they do not have to pay professionals who will decide what investments to make.

Pluses
Although managed funds may offer returns that beat the overall market, investors can expect to pay higher fees.

Over the long haul, the lower fees that index funds charge are likely to offset any advantages that managed funds achieve through investment selection, index advocates say.

They point to research showing market-beating performance by managed funds is almost always fleeting, measured against the decades needed to save for retirement.

Minuses
There is no guarantee an index fund will charge less than a managed fund. So it pays to compare fees between funds with similar investment objectives. Critics also argue that index investing amounts to settling for average. That’s because investors are passing up the potential to beat the market, and are just expecting to match it. Even that’s a stretch, however. Expect slightly below-market returns, after fees are subtracted. And it’s important to remember that plenty of top managed funds have consistently beaten the market for stretches of several years, even if most fail.

Mixed approach
Vanguard’s chief investment officer, Gus Sauter, says in a newly posted article that there is “actually no contradiction in valuing both approaches.’’

Index and managed funds can complement one another, he says, because they seek different goals: “They’re not oil and water, but more like peanut butter and jelly,’’ he says. An investor’s portfolio can benefit from managed funds, provided they charge relatively low fees, Sauter says.

Indeed, Vanguard embraces a mixed approach in its fund lineup. Twenty-nine of its stock funds are managed. Overall, managed funds account for 44 percent of Vanguard’s $1.6 trillion in US fund assets, with index funds making up the rest.