Forbes' Sinquefield: Passive Investors Win as Index Funds Outperform

Sunday, 08 Sep 2013 12:25 PM

By John Morgan

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The index fund is celebrating its 40th birthday as a financial-market investment, and according to Forbes columnist Rex Sinquefield, who helped popularize the concept, is by far the most common way for individuals and institutions to invest.

Sinquefield, now retired as a fund manager, was an investment officer for American National Bank in Chicago when it offered the first Standard & Poor’s Composite Index Fund. The fund was so revolutionary it was “actually considered un-American” in some quarters, he recalled. Indexing stocks and bonds – or passive investing – takes the position that the market does not incorrectly value securities. Thus, index funds represent the collective judgment of investors, since the indexes merely track the prices set by the markets.

“While there are active managers who at times successfully ‘beat’ the market, the success of these outliers is random and not predictive of future success,” Sinquefield wrote in Forbes. “It is quite simply impossible to predict at what point in time an active manager will be successful.”

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

He recalled it took about a decade for index funds to become popular. The number of index portfolios has more than tripled in the past decade, Kiplinger’s Personal Finance reported. In the past five years, the assets of stock indices have grown 70 percent, while assets in actively traded stock portfolios have wilted 20 percent.

“What was once the passionate pursuit of a handful of academics has now become the most popular approach to long-term securities investment. Today, it is a widely acknowledged fact that one person cannot have more information than a market of six billion investors,” Sinquefield said.

“Given the steep current trend toward understanding that the market is always right, the clear pick for today’s investors is not to pick at all.”

Kiplinger reported index mutual funds and related exchange-traded funds (ETFs) have done better than most actively managed funds over time. As an example, Kiplinger said the Vanguard 500 Index, which mirrors the Standard & Poor’s 500-stock index, has outperformed 80 percent of all actively managed large-company, U.S.-oriented stock funds during the past three years.

Jason Hull, owner of Hull Financial Planning, wrote in U.S. News about a study he authored on the 2012 individual results of each U.S stock. His recommendation for stock pickers? “You may think that you’re the next Warren Buffett or Benjamin Graham, but the numbers suggest that your chances aren't very good; if you want to go that route, try hedging against failure by keeping investments in the index as well, though nobody can guarantee returns using either method.”

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

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