Here's the scoop on indexing

ind_illo.top.jpg By Laura Lallos, contributor


(MONEY Magazine) -- The launch of the Vanguard 500 Index Fund in 1976 didn't just make it easier and cheaper to manage a basket of stocks. The first widely available index mutual fund ushered in an entirely new philosophy of investing -- one that said it's better simply to stand still and hold all the stocks in the market than to dart in and out of picks in a futile attempt to beat the averages.

Though "passive" investing was mocked at first, most traditional funds led by stock pickers simply haven't been able to keep pace with the indexes over the years.

So the fund industry -- Vanguard included -- did what you'd expect: It took this elegantly simple concept, copied it, altered it and made a mess.

There are now 325 index mutual funds and 1,053 index-tracking exchange-traded funds (which you buy and sell like stocks) to wade through, including ones targeting specific countries, industries, and niche strategies. Big on Malaysia? There's an ETF for that.

"Index evolution has become index pollution," scoffs investment adviser Rick Ferri. "The only reason some of these indexes are formed is to launch products against them."

But out of this chaos you can create a mix that's perfect for you, whether you want to keep things as simple as possible or design a long-term customized portfolio. And you can do it for very little money, because increased index competition has brought down investment fees.

So if you think there's nothing wrong with good old-fashioned indexing, all you have to do is stick with a portfolio that's as easy as one, two, three -- that is, one total U.S. stock market fund, a total international stock fund, and a total bond portfolio. The cost can be less than $20 per $10,000 invested.

On the other hand, you might feel that an index portfolio, as simple and inexpensive as it is, needs tweaking to be right for you. Maybe because of your job you're overexposed to a particular sector. Or you've inherited investments that tilt your asset allocation in one direction. If that's the case, there are ways to use targeted index funds to balance out your portfolio.

Finally, you might be put off by some of the features of index funds, like the fact that most are biased toward bigger stocks and tend to become overweighted in whatever sector of the market is running the hottest. Even here, you can use some of these new offerings to address your concerns.

The bottom line: Despite Wall Street's best efforts to muck up things, there's no excuse not to index anymore.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.36%4.24%
15 yr fixed3.39%3.26%
5/1 ARM3.36%3.27%
30 yr refi4.34%4.22%
15 yr refi3.38%3.24%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 9:47pm ET
Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.21 0.00 0.00%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17

Sections

Spencer has been a supporting member of the "Good Morning America" cast for the past three years. More

Obamacare sign ups hit 8 million, though final enrollment remains to be seen. More

Office for iPad move is a symbolic victory for Nadella's Microsoft, but the company is still weighed down by many of the same old issues. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

As Detroit moves closer to reaching a bankruptcy deal, retired civilian workers are poised to be left worse off than firemen and police officers. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.