The Index Fund Solution

I recently read a book titled "The Index Fund Solution" by Richard E. Evans with comments from the famous Burton Malkiel (A Random Walk Down Wall Street). This was a very good book. In the near future I intend to read "Bogle on Mutual Funds" and compare the two. In the meantime, I will share a few themes that ran throughout this text.

1. Index funds should constitute the core of any sensible investor's portfolio.
2. Index funds sharply reduce management fees, transaction costs, and taxes.
3. Index funds typically outperform actively managed funds before considering taxes, and their performance advantage grows significantly over time.
4. Index funds tend to be broadly diversified and are generally less risky than actively managed funds.

Indexing, however, does not mean simply limiting yourself to the largest US companies that comprise the Standard and Poor's 500 stock index (I am presently guilty of this). Broad diversification reduces risk.

The end of this book kindly provided a list of sample index fund portfolios. I have attempted to recreate this list below:

%Invested; 30 y/o willing to accept volatility	%Invested; 40s; still willing to accept some risk	%Invested; 65 y/o, retired, very risk averse	Index Fund	Expense Ratio
25	25	25	Fidelity Spartan IF (S&P 500) Or Vanguard Index 500 Fund	.19% .19%
15	10	5	Charles Schwabb Small Cap IF Or Vanguard Small Cap IF	.38% .22%
12	10	6	Vanguard EAFE European Portfolio	.31%
8	7	4	Vanguard EAFE Pacific Portfolio	.35%
10	8	5	Vanguard Emerging Markets Portfolio	.57%
10	13	15	Vanguard REIT IF	.36%
15	22	30	Vanguard Total Bond Market Portfolio	.2%
5	5	10	Vanguard Short-Term Bond Fund	.2%

All of these funds are “no-load” but in order to defray transaction costs there are minor purchase fees associated with most.