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Author: Even rich would come out ahead by using simple index funds

The New York Times' "Wealth Matters" column — targeted to wealthier readers — has served up a profile of Princeton economics professor, Burton G. Malkiel, author of the long-time bestseller, A Random Walk Down Wall Street, and now (with Charles Ellis), The Elements of Investing (Wiley, 2009).

Dr. Malkiel is a strong proponent of investing via no-frills, low-cost index funds. He argues that even the wealthy are more apt to come out ahead by using simple indexes, rather than hiring advisers to help them try to find outperforming stocks, hedge funds, and/or alternative investments.

From the Times:

For the wealthy, index funds have an image problem. They are considered the economy cars of the investing world: they'll get you there but not in style and you're always worried they may break down. Anyone at a serious level of wealth, the thinking goes, needs the equivalent of a luxury sedan, with strategic stock choices, hedge funds, private equity, real estate.

Burton G. Malkiel says this is all hogwash....

[He argues that the wealthy] would have fine returns without the volatility and high fees if they simply used indexes to diversify their money across asset classes. "This is still a strategy that is good for people of all income levels," he said.

Malkiel says many wealthy people waste money by paying for advice that doesn't improve their investment performance beyond what they would experience with index funds.

While the old adage says you get what you pay for, Mr. Malkiel argues the opposite. "The one thing I'm absolutely sure about is the less I pay to the purveyor of the service, the more that will be left for me," he said....

This makes sense for the modest investor with a straightforward portfolio. But the counterargument is that the wealthy need more advice because of the complexity of their assets, and that the advice is worth the fees. (Mr. Malkiel would say the rich just need more tax-planning advice.)...

"You don't need a commodities fund if you're really well diversified and into emerging markets," he said. "You’re going to have some investments in Brazil, which is natural resource rich. It's simple."

We agree with Dr. Malkiel that many investors — including many wealthy investors — overcomplicate matters, thereby increasing expenses without any significant increase in performance. That's why we developed our simple Just-the-Basics strategy.

Although SMI's Upgrading strategy clearly offers superior performance to indexing over the long haul, if the simplicity of indexing strikes your fancy, you won't get any argument from us. Indexing is a solid approach that (as Dr. Malkiel says) "is good for people of all income levels."

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