 Which brings us to number six. How am I doing good? Good. Thanks. Number six use index funds when? possible why when possible Because it's not always possible. I mean there are people I'm sure in this room who? Belong to a 403 B plan of some sort and it's a horrendous plan And all they have is actively managed funds and you can't get an index fund or maybe there's just one index fund available And it's an S&P 500 fund perhaps so when possible though use index funds And I'm going to explain why first before I do that. I have to explain what an index fund is so This is how I like to explain again. I'm using pictures Okay on the left side you have companies Exxon Apple Home Depot Google whatever hundreds of them in fact there are 4200 companies in the United States But These companies are publicly traded. They're publicly traded on a stock market daily Google trades Apple trades You know all these stocks are trading on a daily basis Well, there are companies such as Standard and Poor's who keep track of all this trading keep track of all these prices and The big companies will weigh more in their index than the smaller companies or the tiny companies So indexes are what's called? Capitalization weighted the big companies have a much more weight bigger weighting and then the smaller companies have a much smaller weighting So you get this tier down here. So obviously Apple Home Depot Google and so there are these are big weightings in the S&P 500 But they keep track of that because this is the capitalization weight of the stock market So it is the investable universe. These are the this if you had money to invest in the market And you were looking for stocks to invest in you'd go to the S&P 500 to go to the total stock market Which has 4200 and it's the investable universe by market capitalization now What companies like Vanguard did and Vanguard did this Jack Bogle did this back in 1976 he they went to Standard and Poor's and they said we want to license your index and Standard and Poor's David Blitzer who has happened to be the head of the In index committee at the time remembered the conversation in fact I did a podcast with David and he remembered this conversation He said why would you want to do that? You want to do you want to create an index fund and they Vanguard Jack Bogle said yes, how much would you charge us to create an S&P 500 index fund? And S&P didn't know what the answer was so they agreed on $25,000 was the fit Well little did they know What would happen next right Vanguard creates the Vanguard 500 at the time It wasn't called the Vanguard 500 But they created that index fund and that would they launched it out now It took 10 years before that fund got a billion dollars in it but as it grew and as S&P realized that they That this is really something indexing that they went back to Vanguard and they renegotiated the contract and a few years later Vanguard actually left S&P and went to MSCI and now they're at crisp because S&P was charging too much money There's nobody here from S&P, but I can say that so I know the inside story Anyway, so the big competitive market out there for these indexes, but this is an index So you ended up with an S&P 500 which tracks those 500 stocks Which are tracking the big stocks on the stock exchange which those companies actually exist and that's how they capitalized themselves So that's an index S&P 500 is just an example Total market would be all 4,200 then there were international stocks same thing 6,500 or so stocks traded outside the US index is created the same way and there are bonds Bondisee indices treasury bonds corporate bonds mortgages all put together into the Bloomberg aggregate corporate bond index and I did a podcast with the people who Run the index and also the people at Vanguard who run that fund and it's really interesting to talk to the two So there's all the indexes out there all over the place covering all kinds of asset classes and you have a choice now You didn't have it 45 years ago, but you have it now you can either Buy an index fund that tracks those indices and it's at a very low fee or You can do the kind of the traditional thing 50 years ago 40 years ago, which is to try to pick a Money manager or a mutual fund that is actively managed that's going to beat that index So large cap US stock manager who's going to go out and try to beat the S&P 500, right? So you can either that's active management and You can do this on the international stocks and bonds and so forth Now here's the kicker. What has happened since Jack Bogle and Vanguard created the first index fund and Index funds have proliferated into all these other asset classes I did my very first podcast was with Jack Bogle and we talked about this by 1996 Vanguard had a total stock market index fund a total international stock index fund a total bond minute bond market Index fund and I had a REIT index fund real estate investment trust have pretty much had the four core four type portfolio of index funds all available at Vanguard all low cost and How have those funds performed? Relative to the actively managed funds that we're trying to beat those indices. Well, let's take a look This is what's called the speeder now my last podcast I just did was with Craig Craig Lazara from standard imports indices standard imports Dow Jones indices because they merged and what it what this shows this is just looking at one segment is this is the S&P 500 index Versus the managers who are trying to outperform the index those numbers large cap fund up on top And then mid cap fund which is a mid cap Indicacy and the bottom which is an S&P small capital after one year 55% At the let's read in the top line and skip your data and just go to one year 55% of the active managers underperformed the S&P 500 if we go out further and we look at five years and these are the managers who Survived because so many actively managed funds just go under they they go out of business The mutual fund companies won't tell you this when you look at the mutual fund advertising They're going to advertise all the funds that survived and actually did well They're not going to show you the other half that all went out of business They're not going to show you those so over a five-year period of time of the funds that actually made it five years 84% underperformed the S&P 500 if you go out 20 years 95% of all actively managed large cap mutual funds that we're trying to beat the market Underperformed the S&P 500 and if we go to the mid cap which are smaller companies, but not Small cap tiny companies. We go to the right and look at that 94% over a 20-year period of time of the active managers in the mid cap sector of the market Underperformed the mid cap index and let's go a little further to the small cap funds Which are the small companies and we'll use the S&P 600 small cap index 94% of the active managers who attempted to outperform the small cap index underperformed it all right not I What am I going to spend my money trying to pick the 5%? now I Can be in the top 95% tile over a 20-year period of time just by buying an index fund And I know that there are going to be a few active managers out there and all these asset classes Across the globe There's going to be a few that do outperform, but we don't know who they are today And is it worth going after these managers and the answer is no it isn't if we look at why this occurs The answer is very simple and Alan Roth is going to get to this in more detail in the next session It has to do with fees almost Almost a hundred percent having to do with fees And then it has to do with managers turn over and have to do it funds get too much money And they can't invest the way they used to invest or a few other things But I think Alan when you see his presentation. He's going to talk talk a lot more about fees. So, you know Index funds have very low fees active managers cost money. They have all these research analysts and everybody else They have to hire it's more money. So Generally the low cost of the index funds is the reason over the very long term that the index funds float to the top and get Into the top 95 percentile and this not only happens in the United States It happens internationally it happens in bonds it pretty much happens everywhere And I want to get into the details too much But if you look at the speed of scorecard or the vanguard studies that they do every year Morningstar does studies on this every single year the proliferation of the studies There's a lot of them out there right now 20 years ago They weren't out there you had to dig it up when Jack Bogle first created the index fund in 1996 He had to by hand by hand go back and pull out all the performance of each of the individual index Actively manage funds and put together his own database because there was no Morningstar out there at that time Nobody was collecting this data. This data really wasn't prevalent until around 1997 When Mark Carhart from the University of Chicago actually put together the first comprehensive survivorship bias-free database and then now we see that hey Most active managers don't outperform the market Okay, most will underperform so What do you do? What do I do? What do I believe? Okay? I did a study Ten years ago now that was published. I said if all you did Was buy index funds in every asset class. However, in many asset classes you want This is the three fund portfolio, which is the total stock market US the total international stock market and just a total bond fund If this is all you did just bought a few good low-cost index funds in the asset classes that you want You will be in the 90th percentile of all investors You're gonna be at the top ten percent. Will you be number one? No, I Don't have to be number one. I mean I'm a good pickleball player really I think I am but am I on number one now that's okay. I could be in the 95 percentile I'll be happy with that and and I think the same way with our portfolios. We try to outperform odds are Well, high value high chance you're gonna underperform It's gonna cost you more money and we're not even getting into the taxes of the turnover of going from this fund to that Fund to this one. So this is why we say at the Bogleheads use index funds when they're available Use them in every single asset class. Don't worry about anything else just Invest in a few good index funds and that's it for me