INVESTMENTS - INDEX FUNDS
"This section
contains additional data that supplements basic information contained in
Your
Money Matters
and should be used
in conjunction with the material contained in Your
Money Matters."
Assembling a Well-Balanced Portfolio that Includes Index Funds
Precisely by what percentage, if any, to index a portfolio varies with each investor. You may have time constraints. The less time you have to devote to selecting and monitoring your investments, the more sense index funds make. Although there isn't a clear-cut recommendation for everybody, the following table shows a sample portfolio that utilizes index funds. The proportion of index funds to actively managed funds varies in accordance with the past track records of index funds in the various categories. While index funds have proven to be very effective - large-cap U.S. stocks in particular - more of the portfolio is weighted toward indexing. (Here is where an S&P 500 index fund would fill the bill.) Where actively managed funds still offer advantages over indexing - small-caps and foreign stocks - actively managed funds are emphasized. But in all investment categories in the following table, index funds are used as an anchor for each category.
Should investors who have neither the time nor the experience to manage their own portfolios put all their money into index funds and forget about them? While this is definitely preferable to simply letting the money languish in low-return investments such as money market funds, it is also preferable to buying a group of mutual funds and then never monitoring their performance. But investors who index all of their investments will probably have to be satisfied with a somewhat lower return than they could have gained by selecting and monitoring both actively managed and index funds.
Sample Portfolio that Incorporates Index Funds
|
|
Actively Managed Funds |
Index Funds |
Total |
|
STOCK FUNDS |
% |
% |
% |
|
Growth |
5 |
5 |
10 |
|
Growth & income |
15 |
10 |
25 |
|
Small company |
5 |
10 |
15 |
|
International |
5 |
10 |
15 |
|
Subtotal stock funds |
30 |
35 |
65 |
|
BOND FUNDS |
|
|
|
|
US Government/municipal/corporate |
20 |
15 |
35 |
Total |
50 |
50 |
100 |
Note: This sample portfolio is for an investor who wants an
investment allocation of 65 percent stocks and 35 percent bonds.