Indexed Portfolio Flexes Its Muscles During the Economic Downturn

Imagine walking up to your financial advisor with your newfound knowledge on the superiority of index funds over actively managed funds.

In short, you want to swap your actively managed funds (which pay your advisor very well) for passively managed index funds (which don’t pay your advisor very well).

But she says, “Oh, indexes don’t perform well during market downturns”.  Your advisor might look calm on the outside, but the questions you’re posing are making her sweat.  But you’re impressed by her composure and “knowledge” so you wander away,  and your account stays as it was—in funds that pay the advisor well.

What the advisor doesn’t do, is mention that a responsibly allocated investment account is diversified with stock funds and bond funds.  And that you can own stock indexes, as well as bond indexes. This will dramatically help you during a stock market downturn.   If you’re 40 years old without a pension coming your way, a strong rule of thumb is to have 40% of your money in bonds, or bond funds.

How would a portfolio of indexes–with 40% in bonds–have fared from August 15, 2008 to May 22, 2009, compared to a portfolio of actively managed mutual funds?

The starting date wasn’t chosen randomly.  A friend of mine switched his account from actively managed funds to indexes last August–and I’m revealing his account here.

Compared to actively managed mutual funds that have a minimum of 40% in bonds and 60% in stocks, this diversified portfolio of indexes has performed spectacularly.  And it would also be far more tax efficient than any of the actively managed funds below.

Do you want to see how he did?

You can even compare it with your own portfolio to see how your investments measured up.

read more: Indexes Win!


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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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