Learn About Index Funds

What is indexing? The Fundamentals

Lesson One: Efficient Portfolios of Indexes
The first lesson for index funds investors is to understand the value of a globally diversified portfolio of index funds, tilted toward small and value indexes. Indexfunds.com and Index Funds Advisors, Inc. has identified a set of 20 efficient portfolios which provide among the highest level of returns documented over 80 years, at each level of risk*. An investor only needs to determine where they should be on the scale of 3 to 16 standard deviations, which has been converted to portfolios numbered from 5 to 100. The starting point for that determination is the Risk Capacity Survey.

This graph shows all the indexes used in these portfolios, the 20 index portfolios and small growth, large growth and the IFA-NSDQ simulation indexes. All portfolio data and index data is net of mutual fund and investment advisor fees, except the S&P 500 and IFA-NSDQ. The Big Question for investors: Where does your portfolio plot on this graph, after all fees?

*See Backtested Performance Data | more charts |

Another interesting way to compare the index portfolios above is to look at the shape of the bell shaped curve or the distribution of returns over long periods of time. The dynamic chart below displays the distribution of monthly returns over 65 years (780 months) of 20 index portfolios. Portfolio 5 is very concentrated in the center so it has a narrow bell shaped curve, which 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 or tighter around the average or mean. On the other hand, Portfolio 100 has a wider distribution around a higher monthly average return. This chart helps investors visualize the risk of various investments.

The Big Question? What is the shape of your portfolio bell curve?

See Backtested Performance Data

Index Funds: The 12-Step Program for Active Investors, is a complete investment education program and the treatment of choice for active investors. After you have completed the program, you will be prepared to invest and relax.

An Overview of the 12-Steps

1.  Active Investors: Who is an active investor?
2.  Nobel Laureates: A higher power in economics.
3.  Stock Pickers: A loser's game.
4.  Time Pickers: A loser's game, again.
5.  Manager Pickers: A loser's game, once more.
6.  Style Drifters: And finally, another loser's game.
7.  Silent Partners: Who ate my pie?
8.  Riskese : If you don't speak it, buy treasury bills.
9.  History: Ignore it at your peril.
10.Risk Capacity: What standard deviation is right for you?
11.Risk Exposure: What index portfolio is optimal for your risk capacity?
12.Invest and Relax: Kick back and receive your optimal rates of returns.

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Index Funds Articles Cover all the Basics
How Indexes Are Created: A look at index formation
Index Fund Critics: Why they're wrong
Diversification: It's important to be in many places
The Nature of Risk: Know your investment horizon
Retirement Plans: The best way to save on taxes
Test Your Knowledge: Most fund holders fail badly