23 June 2017

Listen to Buffett and Schwab: Be an Indexer

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Chuck Schwab, founder of Charles Schwab & Co., talked last week about the power and importance of indexing, suggesting that low-cost diversified funds that track indexes are the best approach for 95% to 98% of Americans.

A few months ago, one of the few investment icons actually bigger than Schwab, Warren Buffett, revealed that if his wife survives him, his estate plan will recommend keeping 90% of her inheritance in the Vanguard Index 500 fund, with the rest in short-term government bonds.

For investors who want to follow the leaders here, picking straightforward index ETFs and funds means finding the ones with the lowest costs and putting money to work.

But the spin has already started, suggesting that the indexing strategy can be tailored into something better.

Indeed, the evolution of exchange-traded funds — built mostly like index funds but traded like stocks — has made it so that investors have tremendous choice and opportunity.

With those choices, however, come some problems, because while a legend like Schwab can come out and recommend indexing for average Americans, he’s not suggesting mucking up the strategy.

Look at any chart of the big, brand-name indexes — the S&P, the Russell 1000, and moving on out to total-market options — and the construction of the index doesn’t seem to make much difference. You can basically lay the performance charts on top of each other and the differences are minute.

At that level — precisely what Schwab and Buffett were discussing — simple and low-cost wins; you’re strapping yourself to the market (or a big chunk of it), planning to ride the long-term trend.

Click here for the full column in the Wall Street Journal.

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