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
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.
for the full column in the Wall Street Journal.