Index Funds Should Be Considered

Left out of “l0 Commandments of Mutual Fund Investing” (JofA, Aug.99, page 20) were what I believe to be the two most important pieces of advice:

• In the long run, it is unlikely that an investor will be able to pick a mutual fund that beats the relevant market index. Despite big-name managers and lofty-sounding investment principles, a large majority of managed funds lose out to the unglamorous index funds. Attempting to beat an index fund has a small upside potential and a large downside one.
• Investing in multiple mutual funds, as recommended in the article, lowers risk through diversification. It also virtually guarantees weaker overall performance than the relevant market index fund.

Neil D. Friedman, CPA
Boulder, Colorado

Author’s reply: The argument concerning index funds has some validity, but in only one sector of the equity market—large cap growth. Mutual funds that index the large cap growth sector have done well. However, this is not the case with large cap value, small cap growth, small cap value or international index mutual funds. If index funds are used for those categories, investors would be subject to average or below average performance.

Robert R. Thomas, CFA
Richard Musar, CPA
State College, Pennsylvania