Index Mutual Funds: Profiting from an Investment Revolution

As an excellent review of index fund investing, I give this book an A. Simon's book was one of the first books about index fund investing. He published this book prior to the index fund 1999 peak in popularity. Simon points out that institutional investors put about 35% of their money into index funds versus actively managed funds. At the time he wrote his book, about 6% of individual investor's stock money went into index funds. In 2005, it has risen to about 10% of individual money in index funds. He also pointed out that the smartest people with the most resources for choosing good investments choose index funds. TIAA-CREF indexed about 65% of their $81B stock portfolio to the Russell 3,000 index. CALPERS indexed 85% of their $41B stock portfolio to the Wilshire 2500. Other well known corporations who index a large portion of their pension funds include Deere, GM, and IBM. He also does a good job of reviewing Brinson's famous asset allocation study including how to use index funds to achieve your desired asset allocation. All-in-all, Simon has written a very good book on index fund investing. It will be interesting to see if his prediction of foreign countries (Japan, England, Australia) embracing indexing turns out to be true or not. I would suggest companion books to supplement this book including The Richest Man in Babylon, Bogle on Mutual Funds, The Millionaire Next Door, The 4 Pillars of Investing, A Random Walk Down Wall Street, Wealth of Experience: Real Investors on what Works and What Doesn't, The Coffeehouse Investor, and the Armchair Millionaire.

Simon clearly presents all the evidence as to why passive investing, also known as indexing, represents the best method for any investor to succeed in the market. He goes further by showing how investing in a portfolio of index funds allows the average investor to achieve both less risk and and an expectation of higher returns. Thus the investor is in tune with the precepts of Modern Portfolio Theory.The proof is here - trying to beat the market is a loser's game. It's way against the odds and neither individual investors nor profesionals have deomonstrated any ability to beat the market on a consistent basis. Indexing provides market returns with lower costs, lower taxes, and less stress.

I have spent the last three months researching index funds for purposes of writing a professional paper, and this book is by far the best source of information on the topic that I have found. But it's more than that. In making the case for index funds, Mr. Simon provides a succinct, yet intelligible, description of modern portfolio theory and its place in the world of finance.If you are interested in subjects like portfolio theory, decision-making under conditions of uncertainty, the efficient market hypotheses, game theory, the Third Restatement of Trusts and zero sum games, and just the mention of people as diverse as Peter L. Bernstein, John C. Bogle, Warren Buffett, Alfred Cowles, III, Eugene Fama, Mario Gabelli, Elaine Gazarelli, Edward C. Halbach, Jr., Roger Ibbotson, Peter Lynch, Burton G. Malkiel, Harry Markowitz, John Neff, William F. Sharpe, and Rex Sinquefield causes you to hyperventilate, then this book is for you.Don't let the tacky cover put you off (It would be more appropriate for "How I Went From Nothing to Being a Billionaire in Three Weeks.") This is a well-written and useful book.

Scott Simon's book thoroughly reviews the many advantages of index funds, and the disadvantages of actively managed mutual funds. Many of the standard arguments are presented--the cost advantage of index funds, the difficulty in picking a superior actively managed mutual fund in advance, etc. But, the author has managed to add a few wrinkles here and there. Did you know that investing in index funds can reduce your stress? Well, according to this book that is one of the more important advantages. The book is well documented (as you would expect from a former tax lawyer). Of note is a chapter devoted to the "nuts and bolts" of index funds which gives thorough details about the operations of index mutual funds. The appendix also contains good descriptions of the major indexes.

This book is an excellent and comprehensive study of index mutual funds. By discussing the theories behind index funds, Mr. Simon makes a compelling case as to why they are a superior investment vehicle for most, if not all, investors. In short, decreased costs and decreased risk will create, in the long run, a higher return for invetors. Specifically, Mr. Simon states that index funds will outperform conventional methods of investment (stock picking and convemtional mutual funds) due to decreased management costs and taxes. Active management strategies (again, stock picking and convemtional mutual funds) churn a lot of fees and create many taxable events. Index funds, however, mirror the market -- no such acitve stock picking is necessary. Instead of employing expensive stock pickers and research teams to choose stocks, index funds use mathematical formulas to mirror the index. Instead of constantly buying and selling stock (and creating taxable events), index funds buy and hold. Therefore, there is an inherent cost advanatage in index funds. This cost advantage is especially significant when compounded over the long term. Also, because an index fund is more diversified that a typical portfolio or fund, the risk is lessened, thereby increasing overall performance. The book cites numerous studies and invokes Nobel laureates to support this diversification theory. A stock picker may have some big winners, but on average his losers will make him underperfrom the index, especially when the increased costs and taxes are taken into account. The book documents how some of the greatest investment success stories in recent years inevitably, over the long run, "regress to the mean" (i.e., fall back to the average). The logical and restrained message of this book sets it apart from many other investment books. These books promise results based on investment strategies that are risky or difficult at best and foolish at worst. Mr. Simon's stategies are simple, solid, and proven. In fact, the book cites numerous examples of major pension funds and companies now utilizing index funds. The book also displays a healthy skepticism for the traditional investment information delivery system, and shows why it is not in the best interest of the investment community to promote index funds. Compared to other books and articles on the market, this book is an extremely comprehensive, even scholarly, treatment of index funds. This book should be read by all would-be investors -- before putting any money into the stock market.