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Sunday, July 15, 2012 - Page updated at 07:30 p.m.
Scott Burns: Index funds best for do-it-yourself investors
By Scott Burns
Q: My wife and I have been working with one broker for 30 years. We aren't anywhere near being in the "1 percent."
Our portfolio peaked at $460,000 in November 2007. As the market slid, the financial advice we got was: "The market goes up. The market goes down. You have high-quality funds. Our analysts say you will be fine. You shouldn't try to time the market."
Our investments lost 21.5 percent ($97,000). Way too late, I had her put all of the money in CDs, which were still paying 3 to 4 percent. We would have lost more if we had not done that. As our CDs matured, we cautiously got back into the market.
Our broker is staunchly not in favor of selling our American Funds Growth, Bond and New World holdings to get into the Vanguard index. Can you provide an apples-to-apples comparison of how these four funds have been performing?
A: You received sound advice. Don't blame your broker. She is working within the structure and rules of her brokerage firm.
Choosing American Funds for a client is one of the best ways a broker can serve her client in the environment of a brokerage firm — she gets a commission (as she must to pay her bills), and you get funds that have expenses that are very low compared to most of the funds sold through brokerage firms.
In addition, there have been long periods where American Funds have done very well, including periods where they have done better than index funds.
Index funds like the Vanguard 500 Index are for do-it-yourself investors — people who make their own decisions.
Some people worry that this takes a lot of time and knowledge, but you can manage your own money without any particular knowledge.
All you need is the ability to buy a small assortment of index funds in equal amounts and then rebalance back to equal amounts once a year.
You can do this with any discount brokerage-firm account.
Sadly, most of the legacy financial services firms, such as traditional brokerage houses, are still busy suggesting they have a "special sauce" for beating the market.
According to the Morningstar website, American Funds Balanced Fund A shares have been in the top 25 percent, or better, in the last year, three years, five years and 15 years.
Over the last 10 years, they dipped below that and were in the top 26 percent.
Unfortunately, your particular funds have not done so well and have had periods when their performance was in the bottom 50 percent.
They may not remain there forever, but the possibility is one of the reasons that I have focused on low-cost index funds for many years — if you stick with the major indexes, you'll almost always be in the top 50 percent, and you'll often be in the top 25 percent for equity funds.
With bond index funds, you'll almost always be in the top 25 percent.
Copyright 2012, Universal Press Syndicate
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