Passive Management

finance a la shmoop. how do you judge the performance of an index fund? very

carefully. actually performance means something very different when it comes

to an index fund versus an actively managed fund. in an index fund the

manager doesn't really do anything per se other than rebalance the indices so [man sleeps at a desk]

that they conform to whatever the product was that you bought in the first

place. for example a technology index fund might claim that 12% of its

holdings will have wireless telecommunications related stocks as a

target, but never less than 10% and never more than 15% .and in most cases the

actual stocks that go in the fund are identified beforehand like before the [man smiles at camera]

funds actually really launched. and the relative weightings of those investments

is also predetermined .ie the fund might target having three percent of its total

as shares in Verizon. but if Verizon suddenly does extremely well and doubles

in price in a short period of time well the index fund might have to sell

shares of that stock so that it's weighted holding amount won't pierce the

maximum weighting of 15%. but all this relates to the composition of the fund [pie chart]

not necessarily the performance. since an index fund is a reflection of a given

area like these examples they conform to a general theme, like the Vanguard total

stock market index. the broadest based reflection of the overall market. like

the S&P 500 plus Nasdaq plus the New York Stock Exchange indices or another

one might be the Vanguard small cap Value Index, largely companies under a

few billion bucks in market cap which trade at relatively low price to [value index listed]

earnings ratios ie they are value stocks rather than say growth stocks. all right

next one might be the Vanguard emerging markets stock index. that one's all about

third world countries trying to become second worlders how's that Nigerian

oil exchange looking? or what about investing in Vietnam these days? the

Napalm is mostly washed away by now. and then move it on. yep there's the Vanguard [sink with the water on]

intermediate term bond index, and yes there are bond index funds as well.

intermediate just means that the bonds in this set of bonds mostly come due

within about five years or so. the bottom line is that an index fund

isn't really a managed fund. it's just a reflection of whatever group of stocks

or bonds it is supposed to reflect. so if an index performs poorly, all of the [man holds stock]

fault lies in the one who chose that particular index fund, not the manager of

the fund because well there basically wasn't one, so if your fund as poorly and

you want to scream at the idiot moron financial manager who screwed up your

retirement by picking a bad investment vehicle ,well go find a mirror. [woman grimaces and cries]