Index fund


The index manager reduces the tracking error of holding cash balances by buying a futures contract, or sometimes an exchange-traded fund ETF , with the cash holdings. Indexes have been developed based on alternate weighting methodologies. And it also dips into specialized topics like saving for college and estate planning. A combination of various index mutual funds or ETFs could be used to implement a full range of investment policies from low risk to high risk.

15. September 2018


These low expenses mean that a greater portion of market returns accrue to the mutual fund shareholder where they can continue to compound, as opposed to being siphoned off through intermediaries. Furthermore, indexing's consistent low costs result in greater than average relative performance over long holding periods.

Due to lower fund turnover and longer holding periods, stock market index funds tend to exhibit greater tax efficiency than actively managed funds. This is especially true for total market index funds, large cap index funds, and large growth index funds. These funds rarely realize and distribute a capital gain and any small capital gains distributions are usually long term gains taxed at reduced tax rates. The deferral of capital gains tax liabilities results in a tax-efficient index fund providing higher after tax returns to investors.

While total market, large cap, and large cap growth funds are very tax efficient, it is important to keep in mind that other size small cap and mid cap and style value indexes are much more likely to distribute taxable gains.

When a small cap company grows into a mid cap or large cap company, or a value company becomes a growth company, an index manager will need to sell the stock once the stock migrates out of its current index. Usually this sale will result in the realization of a capital gain.

For this reason and for value indexes higher dividend payouts it is often recommended that these funds be placed in tax deferred or tax free retirement accounts. The and bear markets have improved the fundamental tax efficiency of all index funds, by providing substantial realized losses which can be used to offset future realized gains. Once an investor has crafted an investment policy statement and decided upon an asset allocation , the investor must then implement the plan by selecting appropriate mutual funds for the planned allocation.

In addition to being low cost and tax efficient, stock market index funds make suitable building blocks for asset allocation purposes because they can be trusted to remain reliably close to their declared style parameters. Thus, a US total stock market index fund will not hold international stocks; and an international index fund will not hold US stocks.

A US intermediate investment grade bond fund will not be holding low-graded bonds or international currency bonds. The tendency for funds to shift their center of style gravity is termed "style drift. Such style drift takes the asset allocation control of the portfolio away from the investor and places it into the unpredictable hands of the fund manager.

Another common example of style drift occurs when an active small cap fund grows exceptionally large. The fund usually must buy larger stocks, and will commonly see its center of style gravitate towards a mid cap style.

Many index providers have established trading bands about their size large, mid, and small and style value and growth indexes. These bands are designed to help index funds reduce turnover and transaction costs. The bands, however, introduce a modest degree of style drift in size and style index funds.

The center of style gravity, however does not change. Thus, index funds allow the investor to control the asset allocation decision. The low cost, high tax efficiency, and long term consistency of performance advantages of indexing greatly simplify the task of fund selection and fund monitoring in an investment plan. A crucial advantage for index funds is low costs.

However, expense ratios on similar index funds range from less than 0. The economy and the stock markets are dynamic. An index of the market is not static. As start up companies grow and mature they are added to indexes. For discrete size and style indexes, stocks migrate between small cap, mid cap, and large cap indexes, as well as between value and growth indexes.

To ensure that indexes accurately reflect the market, index providers periodically reconstitute the indexes quarterly or annually. For index fund managers tasked with mandates to track an index, these reconstitution dates require the fund to either purchase or sell the stocks as they are added or deleted from the index.

Inflation protection of 5 percent per year. The benefit of the payment period should be at least three to five years. A lifetime benefit payment period is best.

An elimination period should be affordable. One hundred days is a good elimination period for most people. Coverage cannot be canceled for any reason other than failure to pay premiums. The policy should cover skilled and nonskilled care. Benefits should also cover home health and assisted living care without requiring a prior hospital stay.

No exclusion for particular illnesses like Alzheimer's or dementia. Benefit triggers specify when coverage begins. Waiver of premium when coverage begins. Your annual premium can't be raised unless it's raised for every policyholder in the state. The policy is tax qualified, making the premium tax deductible and the benefits not subject to taxes. A good insurance agent can save you time and money and help you determine what types and amounts of coverage you may need.

All in all I highly recommend this book to any young or inexperienced investors looking to get their bearings and make wise investment decisions. Jan 04, Kit Pang rated it really liked it. We aren't financial planners or money manager looking for clients. We don't have a high-powered, get-rich-quick weekend seminar to sell you. We are all well over 70 years of age, financially secure and haven't missed a meal yet.

Our primary mission is to simply to support Jack Bogle's mission by teaching others how to get the best long-term return on their in Great last paragraph in the introduction from the authors Taylor Larimore, Mel Lindauer, and Michael LeBoeuf: Our primary mission is to simply to support Jack Bogle's mission by teaching others how to get the best long-term return on their investment dollars".

One of the better introduction to investing books that I have read. I think it will be worthwhile to dedicate some time to The Bogleheads and the Boglehead's Forum. Nov 30, Trevor rated it it was amazing Recommends it for: This book isn't about getting rich quick or beating the market every year. It's about the fundamentals of setting long-term goals and then allocating your financial resources in the simplest way possible to achieve those goals.

It covers the basics of everything from investment options and asset allocation to tax implications and how much insurance you should have. It's written in such a way that it's totally accessible for anyone, regardless of their familiarity with the subject-matter.

Bottom line it's a great book for entry-level investors. Oct 19, Tom rated it liked it Shelves: Reading The Millionaire Next Door was my first step to building a responsible financial lifestyle; The Bogleheads Guide to Investing took me to the next level. Both of their books have their flaws, but they do a great job at showing the bigger picture. What did I like about Bogleheads Guide to Investing? The book is accessible for the layman, and c Reading The Millionaire Next Door was my first step to building a responsible financial lifestyle; The Bogleheads Guide to Investing took me to the next level.

The book is accessible for the layman, and comes with concise and clear explanations of common investment vehicles. According to the authors, bonds and mutual funds are the way to go. Diversification means risk management; long-term investing is the way to go and you ought to keep your emotions out of the door. No speculating; but investing. This message is repeated, repeated, and repeated again. Accompanied with wonderful quotes and clear examples.

This is a book you want to buy, highlight and mark. What didn't I like about Bogleheads Guide to Investing? For starters, it's aimed at the American investor. Many chapters and paragraphs are useless for e.

We deal with different tax regulations. I'm Dutch, and I've read the chapters on tax because of my interest in American laws; but for practical purposes, it's useless. Also, the authors seemed to be fond of repeating the same ideas over and over again.

But hey, maybe that's exactly what you need when it comes to investing; an idea that's becomes part of your system, preventing you from making irrational choices. Although I noticed it, it didn't bother me too much. It's a rather short book anyway. Last, but definitely not least, there seems to be an awefull lot of self-promotion on Vanguard, making it feel biased.

Being new to the subject of investing but having taken a keen interest in it over the past year after opening up an Acorns account and learning about asset allocation and portfolio strategies, I wanted to learn more.

I initially picked Burton Malkiel's classic, A Random Walk Down Wall Street but it proved to be too daunting and intimidating for a novice like myself, without even starting the book. I also had this book, The Bogleheads' Guide to Investing , which I picked up from the library to rea Being new to the subject of investing but having taken a keen interest in it over the past year after opening up an Acorns account and learning about asset allocation and portfolio strategies, I wanted to learn more.

I also had this book, The Bogleheads' Guide to Investing , which I picked up from the library to read after. But I decided to switch the order and I'm glad I did! The Bogleheads' Guide to Investing is quite a dense book filled with a lot of useful, practical information and advice. It took me a couple of weeks to finish it because every now and then I had to look up something on the internet to gain a more in-depth understanding and took notes. Lindauer, Larimore, and LeBoeuf take you through the whole lifecycle of investing - from saving, to establishing a sound financial plan, to achieving your goals, and following through and staying the course.

One of the best books I've read in finance that is no-BS, simple but well detailed and written. Investing truly is simpler than Wall Street makes it look, provided you take the time to become an educated investor.

Aug 31, Veronica rated it really liked it Shelves: A very basic book targets for beginner in investing. Especially suitable for Americans. Talked about the importance of saving, the difference of investing options, and further explained why we should focus on index funds.

Other chapters are good for reading Asset Allocations and rebalancing your portfolio. Jun 08, Ethan R rated it it was amazing. A great beginner's guide to financial planning. I recommend reading the last chapter first for the distilled version of the book.

That may be all you need and then you can visit the appendices for more advanced resource recommendations. Or you can flip to the relevant chapter discussing whatever topic you are most interested in. This is the second book I've read in the series by the same author's involving Boglehead's and their philosophy of investing.

I'm so glad I found this group of un-selfish and knowledgeable individuals who really speak frankly and knowledgeably about the in and outs of investing your money. If you need free, in-depth, investment planning guidance, look no further. Apr 13, Amanda rated it liked it. I have to admit that I only read about half this book because I am not at a place in my life where I can start investing. Feb 18, Konrad rated it really liked it. Here's what I learned by chapter: Apr 06, Nick Claxton rated it really liked it.

This was really good book. It goes through all the ways you can invest and also gives you some things to think about.

I say this because it does not really dig deep into ways to get started where or how to do it. It is bias on the Boglehead way to do in the fact that it makes it seem indexing is the only way to go.

While it may be strong and smart is it it really the only way? An awesome to read early in life because it tells you how to prepare for the after work life aka retirement with the "buy and hold" theory. It also gives awesome ways to save for college degrees for kids and how to make the most out of your money for the long run. Tells you pitfalls to look out for and ways to try and avoid taxes at the end. Tells you a lot of things to look out for. Just an all around basic guide to investing. I learned a whole lot in the beginning and a whole lot in the end.

The middle was patchy with good facts and laying down ground work for if your already been investing. An intro to how important it is to start doing it now and don't put it off. Just a great book would give it five stars if it wasn't for the strong bias towards investing. Mar 23, Joshua Goller rated it it was amazing. Stop what you're doing and read this book. Do it right now.

This is one of the most important books I've ever read. The Bogleheads Guide to Investing is a go-to for anyone interested in low-cost retirement planning via index funds.

It almost entirely describes my retirement strategy the major difference being my use of Vanguard index ETFs over traditional Vanguard index funds, despite a buy-and-hold strategy , and is a must-read for anyone who wants to get serious about investing. Feb 01, Tiff rated it it was amazing Shelves: One of the best personal finance books I have read. I am quite basic in this area but despite this the book is very well written and easy to understand and follow.

If anyone is new to personal finance I highly recommend this book. View all 4 comments. Clear, concise, easy to read common sense financial planning. Jul 02, Kristy rated it it was amazing Shelves: Very well-written, effective teaching tool. It is postulated therefore that it is very difficult to tell ahead of time which stocks will out-perform the market. In particular, the EMH says that economic profits cannot be wrung from stock picking.

This is not to say that a stock picker cannot achieve a superior return, just that the excess return will on average not exceed the costs of winning it including salaries, information costs, and trading costs. The conclusion is that most investors would be better off buying a cheap index fund. Note that return refers to the ex-ante expectation; ex-post realisation of payoffs may make some stock-pickers appear successful.

In addition, there have been many criticisms of the EMH. Tracking can be achieved by trying to hold all of the securities in the index, in the same proportions as the index. Other methods include statistically sampling the market and holding "representative" securities. Many index funds rely on a computer model with little or no human input in the decision as to which securities are purchased or sold and are thus subject to a form of passive management. The lack of active management generally gives the advantage of lower fees and, in taxable accounts, lower taxes.

The difference between the index performance and the fund performance is called the " tracking error ", or, colloquially, "jitter. Index funds are available from many investment managers. Less common indexes come from academics like Eugene Fama and Kenneth French , who created "research indexes" in order to develop asset pricing models, such as their Three Factor Model. Robert Arnott and Professor Jeremy Siegel have also created new competing fundamentally based indexes based on such criteria as dividends , earnings , book value , and sales.

Indexing is traditionally known as the practice of owning a representative collection of securities , in the same ratios as the target index. Modification of security holdings happens only when companies periodically enter or leave the target index.

Synthetic indexing is a modern technique of using a combination of equity index futures contracts and investments in low risk bonds to replicate the performance of a similar overall investment in the equities making up the index.

Although maintaining the future position has a slightly higher cost structure than traditional passive sampling, synthetic indexing can result in more favourable tax treatment, particularly for international investors who are subject to U. The bond portion can hold higher yielding instruments, with a trade-off of corresponding higher risk, a technique referred to as enhanced indexing.

Enhanced indexing is a catch-all term referring to improvements to index fund management that emphasize performance, possibly using active management. Enhanced index funds employ a variety of enhancement techniques, including customized indexes instead of relying on commercial indexes , trading strategies, exclusion rules, and timing strategies.

The cost advantage of indexing could be reduced or eliminated by employing active management. Enhanced indexing strategies help in offsetting the proportion of tracking error that would come from expenses and transaction costs. These enhancement strategies can be:. Because the composition of a target index is a known quantity, relative to actively managed funds, it costs less to run an index fund. Large Company Indexes to 0.

The expense ratio of the average large cap actively managed mutual fund as of is 1. The investment objectives of index funds are easy to understand. Once an investor knows the target index of an index fund, what securities the index fund will hold can be determined directly. Turnover refers to the selling and buying of securities by the fund manager. Selling securities in some jurisdictions may result in capital gains tax charges, which are sometimes passed on to fund investors.

Even in the absence of taxes, turnover has both explicit and implicit costs, which directly reduce returns on a dollar-for-dollar basis. Because index funds are passive investments, the turnovers are lower than actively managed funds. Style drift occurs when actively managed mutual funds go outside of their described style i.

Such drift hurts portfolios that are built with diversification as a high priority. Drifting into other styles could reduce the overall portfolio's diversity and subsequently increase risk. With an index fund, this drift is not possible and accurate diversification of a portfolio is increased. Index funds must periodically "rebalance" or adjust their portfolios to match the new prices and market capitalization of the underlying securities in the stock or other indexes that they track.

John Montgomery of Bridgeway Capital Management says that the resulting "poor investor returns" from trading ahead of mutual funds is "the elephant in the room" that "shockingly, people are not talking about. One problem occurs when a large amount of money tracks the same index. According to theory, a company should not be worth more when it is in an index.





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