"Total Stock Market" Index Funds
A New Fad or Investment Nirvana?                   Page 3

We haven't even considered the role short-term fixed income or international investments in a portfolio would have on debunking the second premise. How do you think you would feel if you held on to a total stock market fund for four years only to find out that you would have been better off in CD's? How about eight years later? Twelve years? Sixteen years!? Nineteen years!!? Yes, it happened, from 1966 to the end of 1984.

In contrast, for the first four years the diversified portfolio outperformed the CD return by over 4% per year. After the next four years, due to the severe bear market of 1973-1974, the diversified portfolio fell below the CD return slightly. But the following eleven years proved much more rewarding to the diversified investor.
 

Annual Returns
1966-1969
Diversified Portfolio*	10.1%
One-Month CD	6.0%
Total Market (CRSP 1-10)	4.7%
1966-1973
Diversified Portfolio	5.5%
One-Month CD	6.2%
Total Market (CRSP 1-10)	3.6%
1966-1977
Diversified Portfolio	8.7%
One-Month CD	6.5%
Total Market (CRSP 1-10)	4.1%
1966-1984
Diversified Portfolio	12.6%
One-Month CD	8.5%
Total Market (CRSP 1-10)	8.1%
*25% S&P 500, 25* F/F Large Value, 25% CRSP 6-10 Small, 25% F/F Small Value

Investors (and advisors) who endorse such a simple strategy as buying a "total market" index fund are ignoring some of the most basic realities of investing. They live in a Land of Oz, a make-believe Nirvana inhabited by Munchkins, Lollipop Kids and, now apparently, John Bogle. Like the proponents of "portfolio optimization" software, they will eventually find out that they are still in Kansas. In other words, reality bites. And the reality is this: the total market indexes are dominated by large growth companies, asset classes returns run in cycles, and most investors are extremely sensitive to these cycles. <<Previous                       Next >>

Printer Friendly Page