The TRUE Benefit of Index Funds

I often skim through personal finance magazines looking for articles that are interesting, useful, or even way off-base. I certainly need to wade through quite a bit to find much. As the weather was so nice yesterday, I was skimming through Kiplinger on my back porch and came across an article about Index Funds (see link below).

It's a nice little article about the benefits of index funds (expenses, percentage of times they beat active funds, etc., etc.). I've been an advocate and user of index and passively managed mutual funds since the day I opened the doors of Pillar Financial (November 1, 1997), so I'm always glad to see an article that discusses them in a positive way.

Most of the article really doesn't break any new ground. What is interesting about this particular article, is that it opens up pointing out a key principal in successful lifelong investing, and then proceeds to ignore it for the rest of the article. In the first full paragraph, the author states "Fund consultant Strategic Insight found that investors put $200 billion into stock and bond index funds last year -- an amount that was actually up from 2007. Meanwhile, investors withdrew more than $200 billion from actively managed funds."

Two of the key principles to successful lifelong investing and financial planning are Patience and Discipline (I'll be writing about these and all of the key principals in future blogs). While these two principles may, on the surface, seem very similar, there is a subtle, but important difference. Patience is not doing something wrong while Discipline is to keep doing the right things.

Investors in index funds, during what is hopefully the worst bear market any of us will see in our lifetime, exhibited a great deal of Patience and Discipline. Investors in actively managed mutual funds did not. What would be an interesting study is why. It would be easy to conclude that simply using index funds will give you the patience and discipline that is needed. But I can't believe it's that easy, these traits are developed over many years of life experience. I would hypothesize, based on my experience, that investors in index funds have already developed patience and discipline over their lifetime. And it's having those traits that draw them to index funds, mutual funds that simply promises to provide the returns, with minimal expense, of a market or market segment.

Whatever the reason, it warms my heart to know that there is a portion of investors who understand that their own action or inaction in keeping to their investment plan is of vital importance to ensuring a lifetime of successful investing.

Here's a link to the Kiplinger Article:

Good News About Index Funds