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"Those who follow the crowd can do no better than the crowd" is a favorite quotation of Kirk Miner of the Jack Miner Migratory Bird Sanctuary. With the Dow Jones and the S&P 500 indices at all-time highs, it is not surprising many investors are quite satisfied to be part of the current flock of indexers, enjoying double digit returns.
The Case for Indexing
Index funds buy the securities comprising the index to match that index's returns. In his book entitled "Bogle on Mutual Funds," John Bogle says there is one underlying principle supporting index funds: "Since all investors collectively own the entire stock market, if passive investors, holding all stocks forever, can match the gross return of the stock market, then active investors, as a group, can do no better. They too must match the gross return of the stock market." Bogle is chairman of the Vanguard Group, known for its index products.
Theory aside, more investors are directing cash into index funds than ever before. There are a number of compelling reasons for the current attraction of index funds.
Performance. For the past few years, the S&P 500 Index (the darling of the index funds) has beaten the majority of actively managed stock funds. The primary reason for its superior return is the strong performance of large company stocks.
The S&P 500 Index is weighted by the market capitalization (market value of the outstanding stock) of the 500 stocks in its universe. This means the larger companies have a much greater …