For years, many investment experts have argued that individual investors can't beat the stock market and are thus best off investing in index funds.
"But a growing body of research is calling that point of view into question,"
writes Brett Arends of The Wall Street Journal. "It says the traditional indexes can be beaten — if you know how."
For example, Arends says:
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• Research completed more than 20 years ago showed that value stocks outperform the rest of the market in the long term.
• Nardin Baker, a global strategist at Guggenheim Partners, and the late Robert Haugen, president of investment adviser Haugen Custom Financial Systems, found last year that stocks with low volatility outperform other stock.
• Cliff Asness and Andrea Frazzini of hedge fund manager AQR Capital Management and Lasse Heje Pederson, a finance professor at New York University, found last year that companies with above-average rates of profitability and growth outperform.
• Multiple researchers, including Nobel laureate economist Robert Shiller of Yale, have found that investors could enjoy above-average returns by raising or lowering their weighting of stocks, depending on whether share prices were cheap or expensive.
"It isn't a simple feat. But beating the market may be more than just a pipe dream," Arends notes.
John Bogle, founder of the Vanguard Group, is one who thinks investors are better off in index funds, particularly for retirement investing.
"You should start out heavily invested in equities. Hold some bond index funds as well as stock index funds. By the time you get closer to retirement or into your retirement, you should have a significant position in bond index funds as well as stock index funds," he tells
Bankrate.
"If you want to gamble with your retirement money, all I can say is be my guest, but be aware of the mathematical reality," Bogle told
PBS last year, referring to selecting actively managed 401(k) funds.
"The chances you will do better playing that game are infinitely small. If I want to put a number on it, let me just say [off the] top of the head that maybe you have 0.1 of 1 percent chance of beating the market over time."
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