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Summary
As an industry, too much time is spent arguing over interesting issues. Such debates come at the expense of more important issues, such as thoughtful asset allocation models that encourage broad portfolio diversification and better outcomes for investors. Consider the evidence in this paper. The classic measure of the performance for many investors is large-cap "blend" U.S. equity. Over this particular 10-year period (2002-2011), that particular "measure" of the market ranged from an annualized return of 2.49 percent to 3.44 percent. If investors had a portfolio consisting solely of large-cap U.S. equity, their 10-year experience was very unsatisfactory regardless of which index they attempted to mimic.
Alternatively, consider the returns of multi-index portfolios (using U.S. equity blend indexes) over the same 10-year period: 8.92 percent to 9.11 percent (from Figure 5). During a 10-year span often referred to as the "lost decade," a broadly diversified, multi-asset (i.e., multi-index) portfolio produced a very acceptable 10-year annualized return—regardless of which index provider was utilized in the U.S. equity space. In short, the recipe is more important than the ingredients. Yet we spend too much time fussing over the ingredients and too little time building great recipes.
While the issues of active vs. passive and index variation are intellectually interesting, the more important issue is helping investors and their financial advisors build better investment portfolios. This article illustrates that building a multi-asset (i.e., multi-index) portfolio is not only interesting, but represents the important and relevant "sum of the matter."
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