IndexFunds.com is
a comprehensive resource on index funds investing,
promoting a commonsense approach that seeks to maximize
expected returns at each level of risk. Index funds
are mutual funds or exchange traded funds (ETFs)
with specific and clearly defined sets of rules
of ownership. An extensive database of index funds
articles include information on Dimensional Fund
Advisors (DFA), Vanguard, iShares, and most other
index funds.
For
investment advice on ETFs and index funds and access
to DFA funds, call Index Funds Advisors toll free:
888-643-3133 or visit Index Funds Advisors on the
web: ifa.com.
IFA
has advised clients to invest in DFA since 3/99.
But, you can
not predict when returns like 2003 will occur.
The best strategy is to globally diversify index
funds and rebalance as needed. As Louis Pasteur
said, "Chance favors the prepared mind."
"I
suspect that 2003 will end up being the fourth consecutive
down year for the first time since 1932." -
Jeremy Grantham of Grantham, Mayo, Van Otterloo
& Co.," one of the 30 smartest in investing."
Source: "Is The Bear Market Over?" Smart
Money (January 2003): 71. [more
expert predictions]
Index funds are mutual funds or exchange traded funds
(ETFs) with specific and clearly defined sets of rules
of ownership. When stocks or bonds fall within the rules
of ownership, they are purchased and held. When they
no longer meet the rules, they are sold. These rules
differ with each index and an understanding of how the
rules impact future risks and expected returns is the
key to successful investing.
Take the Risk
Capacity Survey. It will match you to one of twenty
index portfolios. There is only one question for investors:
"Which portfolio of index funds is right for me?
See 20 efficient index portfolios and 17 indexes over
a 34 year period below. Click on a colored portfolio
button to see the asset allocation of indexes. [see
enlarged image]
If
we look all the way back to 1927, the premium
investors earn for small and value exposure is
clear.
The
data above is attributable to the three risk factors
documented by Eugene Fama, Kenneth French, and
Jim Davis. They identified the 77 year historical
returns correlated to these risk factors. These
are known as the risk premiums for each risk factor.
Using a multiple regression, these factors explain
about 97% of stock market returns. The current
premiums are shown below.
An
interesting way to compare index portfolios is
to look at the shape of the bell curve, representing
the distribution of returns over long periods
of time. The dynamic chart below displays the
distribution of monthly returns over 405 months
of 20 index portfolios, using indexes from DFA*.
The low risk Portfolio 5 is very concentrated
in the center so it has a narrow bell shaped curve.
This is representative of a low standard deviation
or risk level and therefore a lower return. This
means the range of probable outcomes is more narrow
around the average. On the other hand, the high
risk Portfolio 100
has a wider distribution around a higher monthly
average return. This chart helps investors visualize
the risk of various investments and is critical
information for portfolio selection by all investors.
The
Big Question? What is the shape of your portfolio
bell curve?
