Larimore: Although I prefer index funds, well-diversified and low-cost managed funds can be a fine investment—certainly better than buying individual stocks. Vanguard must meet investor demand if it is to grow. Indexing takes time and education to understand. Most investors rely on Wall Street's marketing machine for advice instead of independent academic research. This is why I think that IndexUniverse.com, the Bogleheads.org and Morningstar.com are such valuable resources for individual investors.

IU: How does a longtime index funds enthusiast like yourself view exchange-traded funds?

Larimore: I have mixed feelings. Exchange-traded funds are relatively new. They're being heavily promoted with their benefits heavily exaggerated—particularly by brokers who have been losing business to no-load mutual funds. Exchange-traded funds are a type of index fund which, in some cases, can be an improvement over conventional index funds. The lower-cost structure of an ETF is a plus. Unfortunately, most ETFs are being used for trading and speculative purposes. Turnover for NASDAQ Qubes is reported to be over 6,000% a year. Although I prefer the simplicity of holding a few index mutual funds directly with one low-cost company, I can appreciate the benefits of diversified ETFs for investors making few transactions.

IU: You used to invest in high-cost actively managed funds, didn't you? What led to your conversion?

Larimore: I was worse than you describe. Not only did I invest in high-cost managed funds, I was also a market-timer. I even wrote a monthly market-timing newsletter. It was an early edition of Burton Malkiel's, "A Random Walk Down Wall Street" that first made me realize how stupid I had been with our investments. The classic book "Bogle on Mutual Funds" completed my conversion to indexing with its advantages of: lower costs, higher long-term returns, greater diversification for lower risk, better tax efficiency, no manager changes, no style drift, never below-average performance, simplicity and greater peace of mind.

IU: You have made more posts on Morningstar forums than any other contributor. What message would you give to IndexUniverse.com readers?

Larimore: The easiest way to beat the average investor, professional or otherwise is to: save regularly, avoid mistakes, have an asset-allocation plan, diversify with broad-market index funds, keep costs low (including taxes), strive for simplicity, and stay the course.

1 | 2 |