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Investing – keep it simple

Richard Loth

If you have investment expertise, experience and time, you will most likely prefer to handle your own investing activities. These qualifications will allow you to invest in a fairly wide range of securities and mutual funds with varying degrees of sophistication and risk to maximize your returns.However, if you don’t fit into this profile, what do you do? Take a look at an easy, relatively safe approach to investing – index mutual funds.Will McClatchy, in his book, “Index Funds: Strategies for Investment Success,” defines indexing as “the practice of investing broadly in stocks and bonds without attempting to pick winners.” Indexers tend to invest “passively” for the long haul with few brokerage, fund and advisory fees. John Bogle, who founded of the Vanguard Group, invented the index fund back in the 1970s. He believes that picking investment winners is tough – “like looking for a needle in a haystack.” He advocates “buying the whole haystack,” by which he means broad-based market index funds.How come we hear so little about indexing? As an investment vehicle, index funds have been around for many years and are widely used by pension funds and sophisticated asset managers. With index mutual funds, the investing public deals directly with the investment company sponsoring the fund and pays no loads or sales charges. But the vast majority of mutual funds are sold to the public by investment professionals. Because they cannot earn fees from selling index funds, you’re not likely to hear much about them. One-stop investingIt’s not an exaggeration to suggest that you can achieve your lifetime investment objectives by simply using one phone number, one index fund and one company to invest your savings. The number is 800-662-2739, the fund is the Balanced Index Fund (VBINX) and the investment company is the recognized leader for index funds, The Vanguard Group. This fund’s 60-40 split between stocks (Wilshire 5000 Index) and bonds (Lehman Aggregate Bond Index) is the traditional pension fund asset allocation that has been successfully used for decades. As of June 30, the average annual 10-year total return for VBINX was 10.10 percent.For more diversified in indexing, go to Vanguard’s Web site, http://www.vanguard.com, click on “Personal Investors” and then use the “Research Funds and Stocks” tab to get to Vanguard’s fund details, “Index funds only.” The list includes a variety of 28 stock, bond, hybrid and specialty index mutual funds.Index mutual funds do not have sales charges and their operating expenses are rock-bottom. Compared to most managed mutual funds, index funds are a bargain. For example, Fidelity’s popular Magellan Fund (managed) carries an expense ratio of 0.76 percent and has an average annual 10-year total return of 10.09 percent. Vanguard’s comparable S&P 500 fund (indexed) has an expense ratio of 0.18 percent, with an average annual 10-year total return of 11.75 percent. These two funds, except for the differences just mentioned, are virtually the same in all other respects.Comparative performanceIt’s a matter of record that index funds have outperformed, in both up and down markets, the majority of managed funds. Standard & Poor’s most recent semi-annual comparative five-year mutual fund data shows index funds outperforming managed funds in all nine investment categories (company size and style). The benchmark S&P 500 has beaten 53.4 percent of large-cap funds, the S&P 400 has beaten 85.1 percent of mid-cap funds, and the S&P 600 has beaten 76.0 percent of small-cap funds.You’ll never “beat the market” with index funds, but you will enjoy decent returns along with the relative safety of their broad market tracking approach. You’ll do well at investing – and sleep well at night – by keeping it simple.Richard Loth is managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached at (970) 827-5591 or mentorinvesting@comcast.net.vail colorado


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