Earn More, Sleep Better: The Index Fund Solution

What is an index mutual fund? It is simply any mutual fund that simply mimics a stock index (such as the Standard & Poor's 500, the Mid Cap 400, or an international index). Many people equate these funds with the Vanguard Index 500 Fund, which John Bogle popularized, but many others offer the Standard & Poor's 500 as an index fund . . . and there are many other indexes you can buy mutual funds for. If you want to know more about this subject, this book has excellent explanations in chapter 14.Let me begin by saying that this book has many flaws. An outstanding book on how to be a very successful index fund investor has yet to be written. But this book goes much further in that direction than any other book I have read on the subject. If you also read Stocks for the Long Run and Common Sense on Mutual Funds, I think these will clear up the missing elements in this book. Some embarrassing typos still remain, but they are annoying rather than fatal.The book has two parts. The first part compares indexed mutual funds to nonindexed (or actively managed) mutual funds. The second part looks at 5 steps to creating greater wealth using indexed mutual funds. The arguments in part one basically document that indexed mutual fund returns after taxes and after expenses have been higher than almost all managed (nonindexed) mutual funds over long time period. The reasons mostly relate to higher expenses due to management fees, marketing costs, and commissions caused by more turnover of stocks for the managed funds, disadvantages of a large portfolio for buying and selling, and inefficient tax effects of high turnover in taxable accounts. The authors also look at the effects of perfect information, and how much return you get for how much risk. These arguments are well done and accurate. Two elements that were new in this book included looking at the arguments that Peter Lynch and other active managers have made against indexed mutual funds, and looking at risk versus reward. The five step process in the second part of the book is:(1) Get a personal financial plan (with goals stated in dollar terms) (2) Get a personal investment plan (a strategy to meet your goals)(3) Invest with a diversified portfolio of index funds, tailored to fit your needs(4) Get maximum benefits from the tax laws to delay and reduce taxes(5) Buy and hold your portfolio, after starting as soon as possible.Each of these points is somewhat detailed with descriptions of various ways to go about it, alternative sources of advice and information, and ways to make contacts with the advice and information. More could have been done on the first category, but the latter two were well done. The reasons for these factors are better explained in most cases in Stocks for the Long Run than here.I particularly liked the advice to create a worldwide portfolio of indexed funds. Most books on indexing miss that point. The argument is flawed

Here is a book on investing that is clear, practical and downright interesting. I've always been afraid of the market, but here, at last, is a book in simple English that makes things understandable. And it's not just information. It really is a guide for an investment strategy that has proven itself not just in this bull market but over the long haul.

I came to this book for two good reasons. Now I come back to it regularly and I recommend it to others like me. I am an old pro in the advertising business but an amateur investor. My kids are out of school, business is thriving. I have some money to invest and no special feel for the market. This 270-page guide showed me how easy it is to build an investment program that could outperform most conventional "actively managed" mutual funds--and do it at lower risk. It is written in a conversational style, and intended for a wide range of people, from those who know little about investing to active investors.The book has two parts. The first, documents the advantages of index mutual funds and explains why they will outperform conventional funds.Part 2 explains "The 5 Giant Steps to Wealth." Here the reader is taken through a series of simple steps that can lead to a superior investment program. Topics include financial and investment planning, blending stocks and bonds, taxes, and timing. I learned the best way to build a diversified portfolio of index funds, balanced to fit my needs.Evans explains that managers of conventional funds start out with too many strikes against them--invasive sales charges, higher costs, higher taxes, generally higher risk, and other factors. Most basic of all, he said, is human nature: "Whenever the manager of a conventional fund selects a particular stock to buy or sell, he or she is prediciting the future. Human beings do not have that ability. The times when it seems to work are largely a matter of luck--association, not causation."I was first drawn to this book because I recognized one of its author. I hadn't spoken with Dick Evans in 15 years, he was my boss when I first broke into advertising. He taught me how to write simply, directly and humanly for some very persnickety corporate clients. Dick taught me how to make people want to read. So I picked the book off the shelf. But I bought this book because in it I found someone who would give me some markers, a simple way to make sense, and ultimately a profit out of the tumultuous and unpredictable stock market.Dick writes like he talks and he's a compelling speaker. He frames his arguments in concise dramatic vignettes, tells you what you're going to learn, pokes and prods you into understanding, then sums it up before moving on. You travel on step at a time. You end up covering a lot of ground standing at some inescapable conclusions and some very simple how-to directions. This is the first investors guide I ever read all the way through. I did what it said. I sleep better. I wrote Dick a note of thanks. Now I can do back to being an advertising man. Read it and reap.