Nearly every financial adviser will tell you that foreign stocks should be part of a well-diversified portfolio. Yet, an analysis of the data shows that non-US (foreign) stocks as an asset class have underperformed the US market by a meaningful amount for more than 40 years, in addition to having higher risk. So, why do it?
The debate between index fund investing and active fund investing is decades old. It really isn’t much of a debate, if you ask me. Historical data from Vanguard and S& P Dow Jones Indices shows that index funds have outperformed actively managed funds in every investment category over the long-term. But there’s another measure that isn’t discussed as frequently. It’s the payout.
I am a die-hard index fund advocate. Yet, there are times actively managed mutual funds make sense in a portfolio. No, this isn’t April Fools’ Day and I am not going senile. There happens to be situations where a low-cost actively managed fund does a better job than an index fund at capturing the return of an asset class or capturing a unique risk within an asset class.
A friend recently bought the Vanguard FTSE Europe ETF (VGK) after reading an encouraging report of growth in that region. He commented that he only uses exchange-traded funds (ETFs) today because he can “get his money back faster” than if he bought a mutual fund. That led to an interesting conversation about ETFs.
A reader emailed and asked how much of an allocation should he have to Treasury Inflation Protected Securities (TIPS)? This has been an interesting question since the Treasury held the first TIPS auction in January 1997. My answer is about 20 percent of a fixed income portfolio.