A common misconception seems to have gotten around regarding investment packages that offer stocks in the cheapest all-purpose generic form.
The story says, or at least implies, that this kind of deal isn't readily available to individual investors -- and won't be unless Congress passes some kind of sweeping mutual fund reform legislation.
Nonsense. In various forms, it's right there for the taking, right now, by anybody with as little as $1,000 to invest.
Behold the Vanguard Total Stock Market Index Fund, which is already on the menu in many a retirement plan. If the plan at your place of work doesn't offer it, ask Human Resources to put it there. In a pinch, look for its kissing cousin, the Vanguard 500 Index Fund.
Or if you like, choose a market index fund run by any of several dozen other firms, paying close attention to their fees and performance record. Still another option: a low-cost exchange-traded fund such as the iShares Russell 3000 Index Fund.
I single out Vanguard Total Stock Market, with $46.1 billion in assets, because of its popularity and its celebrated stinginess on fees. According to the Boston consulting firm Financial Research Corp., Total Stock Market was No. 7 on the fund bestseller list through the first five months of this year, attracting $3.9 billion from investors.
Though it remains smaller than the Vanguard 500 Index, which at $99.2 billion is the biggest of all U.S. funds, Total Stock Market is attracting more new money now. Its expenses? According to Vanguard's Web site (www.vanguard.com), you get nicked for just 0.2 percent in the standard Investor shares, which have a minimum initial investment of $3,000 in ordinary accounts, $1,000 in some others.
The fee shrinks to 0.15 percent in the fund's Admiral shares, and 0.08 percent in the Institutional shares, both of which set much higher minimum antes. Various other custodial fees can be averted if you keep your account above specified minimums.
No matter how you slice and dice a portfolio of stocks, the cost of investing will never get much lower than that. It doesn't have to, close as it already is to zero.
Slash the costs of investing, we're told over and over, and you'll always come out ahead. Well, um, almost always. In the past five years, through the middle of last week, according to Bloomberg, Total Stock Market Index posted an annual loss of 1.9 percent. Over that same stretch, the average of all growth or value stock funds tracked by Bloomberg lost 1.4 percent per year.
Much of that period was characterized by outsized gains in small stocks that are under-represented in most broad market indexes. Notice that Standard & Poor's 500-stock index funds, which were touted far and wide in the 1990s as all-purpose stand-ins for the market as a whole, are now usually classed as "large-cap value" funds.
Odds are that innovation in stock market indexes isn't over and done with. Five or 10 years from now, quite possibly some other type of standard will be offered as the ultimate way to capture the performance of "the market."
For those wondering what to do now, that kind of speculation is academic. In quest of balance, you can divert some of your money to an index fund specializing in smaller stocks.
The risk is that the market will change shape again, leaving whatever configuration of index funds you have worked out always one step behind.
This is more than a risk, actually -- it's a likelihood. That's what markets do, twist themselves in whatever way is necessary to confound everybody's best-laid plans.
"Unfortunately, there's no way investors can rely on a single equity mutual fund to make their money work as hard for them as it should," Seattle adviser and money manager Paul Merriman says in his FundAdvice.com newsletter.
The good news is, these fine distinctions aren't as important as they are sometimes made out to be. In fund investing, as in most other endeavors, perfection in every detail isn't necessary to achieve good things.
Perfection in index investing awaits the creation of the perfect index. That will most likely never happen, and there's no need to pine for it. A reasonable approximation is available now, with a minimum of fuss.