Indexed Portfolios

Jan 2017 //
Di-worse-ification

…it is possible for some investors to outperform all-stock index funds that buy stocks merely on the basis of their weights in certain indexes.  Indexed portfolios have no regard for the investment merit of any stock, and if this indexing approach sounds too simplistic to be true, please rest assured that it is the case.  Index funds care not a whit about the outlook for specific companies and their stocks.  Interestingly, from our observation the average long-term investor’s portfolio (if he or she is advised by the typical stockbroker or “investment consultant”) includes numerous investments from asset classes that are demonstrably inferior to stocks over the long run.  We continue to be amazed at the portfolio statements we see from prospective clients, filled with the likes of commodities funds, low-yielding fixed-income investments, and nebulous, frequently expensive “alternative” investments.  We would hazard a guess that it is all but impossible for such portfolios to keep up with the average return for stocks over the long run.  These “di-worse-ified” portfolios help us to gain new clients, but we wish other investors didn’t have to suffer so much at the hands of this ineffective approach.