Word: indexable
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Most professional investors, including me, scorned index funds for years. I used to think, heck, if I just picked the 400 best of the 500, I could do better. It hasn't played out that way. Any investor who sought value among smaller stocks has seen his returns lag badly. The Russell 2000, an index of small-cap stocks, has fallen about 20% so far this year, and trailed the S&P 500 nearly 11 percentage points...
...lately the Generals have come under attack for being too richly priced relative to their earnings and other benchmarks of value. And they got that way, in large part, precisely because they belong to the most popular index and simply got floated higher and higher on a tide of investor cash. Just this week Procter & Gamble, a charter member of the S&P 500, announced that it could not meet its growth targets. Coca-Cola too has stumbled on slower overseas growth. And the computerized "sell programs" have made the Generals ride a roller coaster of late...
...stocks will reward the patient, as they always have before when they were this much cheaper than the large caps. If you don't have time to research individual companies, consider a solid small-cap fund like Babson Enterprise II or Berger Small Cap Value, or a Russell 2000 index fund, which gathers the small-cap castoffs in a neat bundle. Or buy a fund based on the Wilshire 5000 index, which includes both large- and small-cap stocks. Both types are sold by fund companies like Vanguard and Fidelity. But do me a favor, and do one for yourself...
...that, many funds have paid a price. Weary of laggard returns, investors have been shifting billions of dollars to passive funds like the Vanguard Index 500, where they are assured of getting market-matching results (and lower fees). Now active managers are striking back, brandishing what I'll call the "big-bet" fund. By limiting the number of stocks in tow and generally holding on longer, these funds correct some of the faults that have driven money to the indexers...
Meanwhile, index funds--the bane of active managers--continue to dazzle. Their weak spot was supposed to be a down market. But when the market tumbled in August, the index funds held up better than most. Which tells you that if you can hitch your wagon to a star, big-bet funds are worth it. Failing that, though, better just to stick your money in an index fund and let it ride...