Another Case for Index Funds

On Sunday, I cleaned my office and I came upon an interview with Robert Wilson by Brett Fromson of the Street.com. (It's several years old.) Robert Wilson is one of the great investors of the past half century. A hedge fund pioneer, he took $15,000 of his own money in 1949 and parlayed it into a $226 million fortune when he retired in 1986. He did by investing, not raking in fees. He was a billionaire at the time of the interview.

But here's the fascinating part. When he "retired" he divided his money among roughly 20 aggressive top-flight money managers. He ended up firing 14 over the years, but kept roughly the same number overall. But here's a calculation by Wilson:

Up until the beginning of 1999, I would say that if I'd put half of my money, in fact, I actually did a rough calculation of this, if I'd put half of my money in an index fund -- the S&P, the Vanguard fund -- and half of my money in two-year Treasury bills, I would have done almost as well as these managers did. The problem is, Brett, in any year, some manager was sort of losing touch and had to be replaced, another manager, who was doing fabulously, had a bad year, and things average out. I found it very frustrating, I was in fact, running a fund of funds and when I say very frustrating, that's overstating it. I didn't do anything about it and ...

He could have done almost as well with equity index funds and T-bills, with a lot less work and frustration.

What is his advice for you and me? Here goes:

I'd say as a general rule put it in index funds, there are even growth stock index funds now. I don't see why small investors should horse around with money managers.

They cost. They're more expensive than index funds, and there's no evidence that they do as well over a period of time.

Indexing is terrific for the individual investor.