NEW YORK (TheStreet) -- Earlier this week Warren Buffett drew a lot of media attention for his long standing belief that most investors are better off just owning an index fund, specifically the Vanguard S&P 500 Index Fund (VFIIX).
This came up again after a letter of instruction reported by the Washington Post to be part of his will surfaced with direction of how to allocate his wife's inheritance.
"Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers."
Of course many investors do not simply put all of their equity exposure into an index fund for a variety of reasons including the belief they can beat the market which some do, enjoyment of time spent on the task, feeling the need to manage to a specific outcome like higher dividend yields or lower volatility and even simply wanting to gamble in the stock market.
An even bigger proponent of indexing is of course Jack Bogle who founded the Vanguard Group and while most readers of TheStreet are not indexers it is important to understand the fundamental argument of indexing so that when an investor chooses to engage markets more actively does so as a more informed participant.
Most active investors do not outperform the market. The Standard & Poor's Indices vs. Active Funds keeps tabs on active manager performance and it recently reported that for the year ending June 30, 2013, only four of 10 active managers outperformed and the numbers go down from there when considering outperformance over multiyear periods. Investors who are exceptions tend to be famous billionaires like Stanley Druckenmiller and Buffett himself.