Investing by the Numbers The Active vs Passive Approach? Mark Hebner Index Funds Advisors, Inc. 19200 Von Karman Suite 500 Irvine, CA 92612 888-643-3133 www.ifa.com Reference sources can be found at www.ifa.com and the Index Funds: The 12-Step Program
Dimensional Fund Advisors (DFA) ranks #1 of all mutual fund companies, with strong ties to Univ. of Chicago academics.
Eugene Fama ranks #1 out of 44,492 authors of academic economic research. He is a Univ. of Chicago Economist, CRSP Director, and DFA Director of Research. If you don’t understand his work, someone who does will be taking your money.
Univ. of Chicago ranks #1 in the world for Nobel Prizes in Economics (9.)
Over $ 1 trillion dollars of index funds are now invested in pension plans.
Of the original 500 stocks in the S&P 500 in 1957, 426 were taken off the index and only 12 of 74 remaining ended up with an index beating return. Leaving a 2% chance of picking the stocks in advance that beat the average return.
Over the last 17 years, the S&P 500 had a total return of about 17 times the average equity investor, after inflation. IFA estimates that after inflation, taxes, and all related expenses the average equity investors actually loses* money over 17 years. *the mathematical expectation of the speculator is zero – before costs.
The famous Janus and Magellan funds both claim S&P 500 beating returns. Since about 19 % of their return went to taxes, they both underperformed the index by about 0.5% per year over 15 years, in taxable accounts.
Morningstar says you need 20 years of risk and return data to draw statistically meaningful conclusions about mutual funds. Of their 11,000 mutual funds in their database, only 22 managers have 20 years tenure. Only 2 have a risk-adjusted returns in excess of the S&P 500 over the last 10 years. None beat a global index fund portfolio.
Recent research concluded that stock selection and market timing contributed nothing to long term returns. 100 % of returns are explained by asset allocation to appropriate benchmarks using index funds.
100% of 68 comparable bond funds were outperformed by the Salomon World Government Bond Fund Index.
There are 250 academic research papers listed in the article database in the library of ifa.com. They support the passive indexed strategy of capturing risk factors and their related returns in the most efficient low cost manner.
1. How do I make a return on my capital? Expose it to risk (engage in capitalism) 2. What is risk? The possibility of loss. The degree of probability of such loss is usually specified. 4. Where do I find risk? The most risk and return has been found in small and low priced stocks. (selling close to book value) Q and A
5. How do I get the highest return for a specified level of risk? Diversify and passively hold risk factors captured within multiple index funds. 6. How much risk exposure should I have? Measure your risk capacity with the Risk Capacity Survey .
Home Page Stress Relaxation Style Drift, Asset Allocation and risk drift Style Purity, Asset Allocation and risk consistency Stocks, times, managers and style picking. Highly suspect risk and return data, with very high std error of the mean. 28 yrs simulated risk and return data on risk factors captured by many of the indexes. Low diversification, un-rewarded and higher risk, and lower and less reliable returns. Increased Diversification, reduced risk, higher and more reliable returns Higher portfolio turnover and the high costs of “silent partners in your returns. Lower portfolio turnover, taxes, fees and expenses Because you avoid… Because you get…