In the 1980s and 1990s, the index community was the voice of reason in the investment debate. Today, however, credible voices within the index community are too often drowned out by a vocal fringe that does more to polarize than to advance the investment discussion.
Early index adopters correctly pointed out that not all managers can be above average, that costs and taxes matter, and that a long-term strategic view is more conducive to investor success than is short-term trading. They asserted, correctly, that indexing is an assured way to get an above-average long-term result after considering costs and taxes.
The math is compelling. Before frictional costs, an investor would expect a broad market index to produce a 50th percentile return. After taxes, trading costs, and expenses are considered, however, a no-load, low-cost index fund should move up from the 50th percentile toward the top quartile. (Jack Bogle himself has stated that the whole case for indexing falls apart if not prefaced by the words no-load and low-cost.) By sacrificing a shot at being in the top quintile under most conditions, an investor can usually avoid the bottom half over the long term, which is exactly what’s happened for the past 15 years (as of Dec. 31). In that period, the Vanguard 500 Index Investor Fund VFINX ranked in the 37th percentile of the large-blend category, and that’s before taxes or loads were taken into account. Clearly, indexing is a smart bet.
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