In September 2006, I gave a seminar to teachers at Singapore American School, suggesting that they could thrash the investment returns of most professional investors (especially after taxes) if they built low cost portfolios of index funds.

Creating a sample portfolio with a hypothetical $200,000, I promised to track the returns, while giving the attendees access to the online tracking account at

Just a few months later, the American Funds company introduced its Target Retirement Funds. Each Target Fund represents a combination of American Fund mutual funds:  entire portfolios rolled into one.  They contain bond funds and stock funds, with the bond components increasing slightly each year, as the investor gets closer to retirement.

In contrast, the portfolio of indexes that I created didn’t require a bunch of overpaid analysts.  Nor did it come with a broker’s sales commission incentive.  It simply represented the world’s stock market, balanced with a U.S. bond market index.  And you could purchase the indexes without paying a sales commission.

The indexed portfolio was split into thirds:

  • 33% in Vanguard’s U.S. total stock market index
  • 33% in Vanguard’s international stock market index
  • 33% in Vanguard’s total bond market index

I rebalanced the portfolio once a year, taking roughly 10 minutes out of my day.  Every other year, I increased the bond market component as my hypothetical investor grew older (bonds currently represent 38% of the total portfolio).

How has the indexed portfolio compared with the results from the slick team at American Funds?

The closest American Fund Target Retirement fund, based on similar stock/bond allocations, is the Target Retirement 2020 fund.  Since January 2007 (when the American fund was first available) the indexed portfolio has given it a royal hiding.

Comparative Returns – January 2007  to August 2012


Is your broker’s annual Christmas card worth $46,064?

The comparative difference between the hypothetical $200,000 portfolios amounts to $46,064 after just five years, eight months.

Exactly $11,500 of that money would have gone to the salesperson—some of it into college funds.  Too bad it wasn’t for your kids.  The remaining $34,564 was a penalty investors suffered for internal fund costs and poorly allocated money.

Without a pension to look forward to, I can’t afford to invest in actively managed mutual fund products—especially those charging sales fees of 5.75%

Can you?