B UCK F INANCIAL A DVISORS , LLC
"Helping you Determine your Financial Future”
A Case For Index Fund Portfolios
Vol. 9
Issue 2
Mar 2014
The success of individual index funds outperforming their respective actively managed funds has been widely documented. But, little research regarding a portfolio of index funds has been completed. In my reading this month I
read a research study by Rick Ferri and Alex Benke. They examined the results of a portfolio of randomly selected
active managed funds and compared them to a portfolio of index funds. The outcome of these studies showed the
index portfolios had a large probability of beating the actively managed funds.
One of the most used allocation of stock and bonds is the 60% stock and 40% bonds strategy. They compared a
simple three fund portfolio of 40% US stock, 20% international stock, and 40% bonds. The time period used was
16 years as that is the longest period that all three index funds existed. The index portfolio beat the randomly selected actively managed portfolio 82.9% of the time during this period.
The second scenario was to examine the results over different time periods. They examined three consecutive 5
year time frames and over the complete 15 year period, 1998-2012. The results show that the lowest 5 year period
gave the edge to the index portfolio 66.1% of the time, the highest 85.5%, and the third 77.5%. Overall the 15 year
time frame shows the index portfolio performed better 83.4%. Over the long term, the probability of an index
portfolio out preforming an actively managed one is higher than the average of the three short term periods.
A third scenario was run with multiple asset classes. They were equally weighted portfolios of three funds, 5 funds
and 10 funds; they used a ten year period from 2003 through 2012. Once again not only did it show the index portfolios out preformed the active funds, but it also showed, the more assets classes in the portfolio increased the
probability of the index portfolio besting the actively managed portfolio.
Additional scenarios studied the effect of filtering actively managed funds for low expense and risk adjusted performance; the results were the same, the probability of superior performance went to the index portfolio.
The conclusion is, from the simplest portfolio which started with an 80% probability of outperformance to a broader multi-asset portfolio with a probability of 90%, the results have significant and practical implications for investors seeking a strategy that can give them the highest chance of reaching their investment goals.
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Ask the CFP®
What is the difference between a Traditional IRA and a Roth IRA?
Charles Buck CFP®
“We make a living by
what we get, but we
make a life by what we
give.”
Winston Churchill
The most immediate and well known difference is the Traditional IRA (IRA)
is funded with pretax dollars and the Roth IRA (Roth) is funded with after
tax dollars. In retirement a Roth has tax free withdrawal of funds, with the
IRA you pay ordinary income tax rates on all withdrawals. Technically,
there is no difference in your ultimate benefit if you are in the same tax
bracket when you invest the funds as when you withdraw them.
Other less known benefits of a Roth; contributions can be withdrawn anytime without tax or penalty. The IRA has a penalty if any funds are withdrawn prior to age 59½. That same penalty does apply to Roth earnings and
possibly conversions.
IRAs have required distributions starting at age 70½. There is no distribution requirement, for the Roth. The only time a Roth has a required distribution is when it is inherited by a non spousal beneficiary.
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