Word: indexed
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Dates: during 1990-1999
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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...
...increase was accounted for by such large companies as Coca-Cola and Microsoft; many smaller stocks were left behind. In the S&P 500, virtually all the gains in share prices in recent months were made by the 50 largest. At the same time, the Russell 2000 index of smaller stocks--traditionally favored by many individual investors--was off 29% from its April high. And as of Monday, the average stock on the New York Stock Exchange was off 38% this year. Even before last week, nearly half of U.S. domestic stock funds were losing money for the year...
...your tolerance for risk is higher, try one of the concentrated mutual funds that I assess in my column near the end of this magazine, in Personal Time. Or invest in the small stocks of the Russell 2000, preferably through an index fund or an actively managed small-stock fund. These small stocks have been beaten down more than their larger brethren, despite having comparable earnings...
...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...