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Winning with index funds
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July 23, 1997: 5:31 p.m. ET
Jerry Tweddell says they work, and beat managed funds over the long run
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NEW YORK (CNNfn) - Jerry Tweddell, co-author of the book "Winning with Index Mutual Funds," has a very simple suggestion. He recommends switching a large part of assets from actively managed funds to the simpler index funds, which he says are more profitable.
Mr. Tweddell joined anchor Lauren Thierry on CNNfn's "In The Game." Here is the transcript from that interview.
THIERRY: Well, first of all, let's define it. The index funds, of course, following the S&P and really nothing but. But tell me why, then, we should be dumping mutual funds--the actively managed ones.
TWEDDELL: Well, I'm not sure I advocate dumping them, but I do say that probably most investors should have 30 to 50 percent of their money in index funds. And the reason is very simple -- they work. Right now is a little unusual period. Nine out of 10 are beating managed funds.
THIERRY: Right.
TWEDDELL: But over the long term, it's usually about 70 percent of the funds trail the S&P 500 Index.
THIERRY: So if you're going to stay in the market for long term, if you could just keep up with the S&P, you're going to be winning, in effect.
TWEDDELL: You will beat most actively managed funds. And the reason is simply cost. It costs about 2 percent a year to run a managed fund, 0.2 of a percent to run an index fund.
THIERRY: It does sound like a real "stay the course" mentality here. You really do eliminate a lot of risk, at least from going down below the index, though. But you really can't gamble. There are some people out there who like the element of risk.
TWEDDELL: They're no fun at all. (Laughter) Except people that have owned them for a few years. It's sort of fun to look at the rankings.
THIERRY: Well, then tell me what you would recommend. If you were going to go with an index fund, what would be your best pick?
TWEDDELL: Since the major pension funds in this country are typically indexed, maybe 1/3 of their assets, I think no less than that amount by most investors. And there can be some actively managed funds in the mix also. And the other thing with indexed funds -- the most common, of course, is the S&P 500. That represents 70 percent of the U.S. market. So you're in the biggest, largest, strongest stocks that trade in the most efficient markets.
THIERRY: Honestly, don't we also have a lot of mutual fund managers out there who are really closet index funds followers? They just want to stay with the herd. They sort of have a follow-the-herd mentality anyway?
TWEDDELL: Yes. And those are the funds I would really stay away from, because you're paying brain surgeon fees and getting parking lot attendant services. So if they're just mimicking the S&P 500, it's a waste of time and investors' money.
THIERRY: But there is so much pressure on so many of these managers to actually stay with the herd or at least not go down below. So if they do anything that might be perceived of as fairly outrageous, if everybody else is doing the same thing, they can't exactly be blamed for going away from the pack. Take Jeffrey Vinik.
TWEDDELL: No. And the performance pressures are such now that 75 percent of the funds have a higher risk rating by Morningstar -- that's stock funds -- than does a standard S&P 500 Index fund.
THIERRY: All right. You also would suggest indexing your bond portfolio?
TWEDDELL: It's a great way to invest in bonds because the bond market is actually more efficient than the stock market. So it works better in theory and in practice, also. 
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