Tags: Goldberg | index | fund | actively

Financial Adviser Goldberg: Don't Put All Your Eggs in an Index Fund Basket

By Dan Weil   |   Monday, 25 Aug 2014 09:49 AM

Everyone from Vanguard Group founder John Bogle to investment icon Warren Buffett has extolled the virtues of stock index mutual funds and exchange-traded funds.

They like these funds because they provide market returns at low expenses and can fall no further than the stock market as a whole.

But Steven Goldberg, a financial adviser at Tweddell Goldberg Investment Management in Washington, D.C., sees a limit to the funds' usefulness.

Editor’s Note:
Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now


"I think index funds have a place in virtually every portfolio. But, in my view, few portfolios should consist entirely of index funds," he writes in Kiplinger.

"Why? Because index funds are designed to give you all the upside of bull markets and every bit of the downside of bear markets. Only good actively managed funds can protect you from some of the pain of a bear market."

Goldberg cites FPA Crescent as a strong actively managed fund. It has generated an annualized 9.1 percent return during the last decade, compared with 8.4 percent for the S&P 500.

The reason for the fund's success, according to Goldberg, is because fund manager Steve Romick dodged a lot of the 2007-09 bear market. FPA Crescent lost just 27.9 percent, while the S&P 500 plummeted 55.3 percent.

"Yes, the fund's annual expense ratio of 1.14 percent is high compared with the fees charged by index funds, but, in this instance, it's worth it. Today, the fund has just a bit more than half of its assets in stocks and most of the rest in cash," he explains.

"Broad-based index funds . . . make sense a lot of the time for a lot of investors. But the wholesale rejection of actively managed funds makes no sense at all — and will cost investors dearly during the next bear market."

Meanwhile, Vanguard index funds, with an endorsement from Buffett, are attracting investors.

That has boosted the money manager's assets under management to a record of almost $3 trillion, The Wall Street Journal reports.

Buffett's recommendation came in his annual letter to Berkshire shareholders in March. He wrote that most investors would benefit from following the instructions in his will.

Those instructions are to "put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)," Buffett said.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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