Which brings us to number six. How am I doing? Good? Good, thanks. Number six, use index funds when possible. Why when possible? Because it's not always possible. I mean, there are people, I'm sure, in this room who belong to a 403(b) plan of some sort, and it's a horrendous plan.

And all they have is actively managed funds. And you can't get an index fund. Or maybe there's just one index fund available, and it's an S&P 500 fund, perhaps. So when possible, though, use index funds. And I'm going to explain why. First, before I do that, I have to explain what an index fund is.

So this is how I like to explain. Again, I'm using pictures. On the left side, you have companies-- Exxon, Apple, Home Depot, Google, whatever, hundreds of them. In fact, there are 4,200 companies in the United States. But these companies are publicly traded. They're publicly traded on a stock market, daily.

Google trades, Apple trades, all these stocks are trading on a daily basis. Well, there are companies, such as Standard & Poor's, who keep track of all this trading, keep track of all these prices. And the big companies will weigh more in their index than the smaller companies or the tiny companies.

So indexes are what's called capitalization weighting. The big companies have a much bigger weighting. And then the smaller companies have a much smaller weighting. So you get this tier down here. So obviously, Apple, Home Depot, Google, and so on, these are big weightings in the S&P 500. But they keep track of that.

Because this is the capitalization weight of the stock market. So it is the investable universe. If you had money to invest in the market and you were looking for stocks to invest in, you'd go to the S&P 500 or go to the total stock market, which has 4,200. And it's the investable universe by market capitalization.

Now, what companies like Vanguard did-- and Vanguard did this, Jack Bogle did this back in 1976-- they went to Standard & Poor's. And they said, we want to license your index. And Standard & Poor's David Blitzer, who happened to be the head of the index committee at the time, remembered the conversation.

In fact, I did a podcast with David. And he remembered this conversation. He said, why would you want to do that? You want to create an index fund? And Vanguard, Jack Bogle said, yes. How much would you charge us to create an S&P 500 index fund? And S&P didn't know what the answer was.

So they agreed on $25,000 was the fit. Well, little did they know what would happen next, right? Vanguard creates the Vanguard 500. At the time, it wasn't called the Vanguard 500. But they created that index fund. And they launched it out. Now, it took 10 years before that fund got a billion dollars in it.

But as it grew and as S&P realized that this is really something, indexing, that they went back to Vanguard. And they renegotiated the contract. And a few years later, Vanguard actually left S&P and went to MSCI. And now they're at CRISP because S&P was charging too much money. There's nobody here from S&P.

But I can say that. So I know the inside story. Anyway, so there's a big competitive market out there for these indexes. But this is an index. So you end up with an S&P 500, which tracks those 500 stocks, which are tracking the big stocks on the stock exchange, which those companies actually exist.

And that's how they capitalize themselves. So that's an index. S&P 500 is just an example. Total market would be all 4,200. Then there are international stocks, same thing. 6,500 or so stocks traded outside the US. Index is created the same way. And there are bonds, bond indices, treasury bonds, corporate bonds, mortgages, all put together into the Bloomberg Aggregate Corporate Bond Index.

And I did a podcast with the people who run the index and also the people at Vanguard who run that fund. And it's really interesting to talk to the two. So there's all the indexes out there all over the place covering all kinds of asset classes. And you have a choice now.

You didn't have it 45 years ago. But you have it now. You can either buy an index fund that tracks those indices, and it's at a very low fee. Or you can do the kind of the traditional thing 50 years ago, 40 years ago, which is to try to pick a money manager or a mutual fund that is actively managed that's going to beat that index.

So large cap US stock manager who's going to go out and try to beat the S&P 500. So you can either-- that's active management. And you can do this in international stocks and bonds and so forth. Now, here's the kicker. What has happened since Jack Bogle and Vanguard created the first index fund?

And index funds have proliferated into all these other asset classes. My very first podcast was with Jack Bogle. And we talked about this. By 1996, Vanguard had a total stock market index fund, a total international stock index fund, a total bond market index fund. And it had a REIT index fund, Real Estate Investment Trust.

So pretty much had the four core four type portfolio of index funds, all available at Vanguard, all low cost. And how have those funds performed relative to the actively managed funds that were trying to beat those indices? Well, let's take a look. This is what's called the SPIVA. Now, my last podcast I just did was with Craig Lazara from Standard & Poor's Indices, Standard & Poor's Dow Jones Indices, because they merged.

And what this shows-- this is just looking at one segment. This is the S&P 500 index versus the managers who are trying to outperform the index. Those numbers, large cap fund up on top, and then mid cap fund, which is a mid cap indice, and the bottom, which is an S&P small cap.

After one year, 55%-- let's read in the top line, skip year to date and just go to one year-- 55% of the active managers underperformed the S&P 500. If we go out further and we look at five years-- and these are the managers who survived, because so many actively managed funds just go under.

They go out of business. The mutual fund companies won't tell you this. When you look at the mutual fund advertising, they're going to advertise all the funds that survived and actually did well. They're not going to show you the other half that all went out of business. They're not going to show you those.

So over a five year period of time, of the funds that actually made it five years, 84% underperformed the S&P 500. If you go out 20 years, 95% of all actively managed large cap mutual funds that were trying to beat the market underperformed the S&P 500. And if we go to the mid cap, which are smaller companies, but not small cap, tiny companies, we go to the right.

And look at that. 94% over a 20 year period of time of the active managers in the mid cap sector of the market underperformed the mid cap index. And let's go a little further to the small cap funds, which are the small companies. And we'll use the S&P 600 small cap index.

94% of the active managers who attempted to outperform the small cap index underperformed it. All right. Now, am I going to spend my money trying to pick the 5%? No. I can be in the top 95% tile over a 20 year period of time just by buying an index fund.

And I know that there are going to be a few active managers out there. And all these asset classes across the globe, there's going to be a few that do outperform. But we don't know who they are today. And is it worth going after these managers? And the answer is no, it isn't.

If we look at why this occurs, the answer is very simple. And Alan Walters is going to get to this in more detail in the next session. It has to do with fees. Almost 100% having to do with fees. And then it has to do with managers turnover and have to do with funds get too much money and they can't invest the way they used to invest.

There are a few other things. But I think, Alan, when you see his presentation, he's going to talk a lot more about fees. So index funds have very low fees. Active managers cost money. They have all these research analysts and everybody else they have to hire. It's more money.

So generally, the low cost of the index funds is the reason over the very long term that the index funds float to the top and get into the top 90%, 95% tile. And this not only happens in the United States. It happens internationally. It happens in bonds. It pretty much happens everywhere.

And I don't want to get into the details too much. But if you look at the SPIVA scorecard or the Vanguard studies that they do every year, Morningstar does studies on this every single year. The proliferation of the studies, there's a lot of them out there right now. 20 years ago, they weren't out there.

You had to dig it up. When Jack Bogle first created the index fund in 1996, he had to, by hand, by hand, go back and pull out all the performance of each of the individual index actively managed funds and put together his own database because there was no Morningstar out there at that time.

Nobody was collecting this data. This data really wasn't prevalent until around 1997 when Mark Carhart from the University of Chicago actually put together the first comprehensive survivorship bias-free database. And then now we see that, hey, most active managers don't outperform the market. Most will underperform. So what do you do?

What do I do? What do I believe? I did a study 10 years ago now that was published. I said if all you did was buy index funds in every asset class, however many asset classes you want-- this is the three-fund portfolio, which is the total stock market, US, the total international stock market, and just a total bond fund.

If this is all you did, just bought a few good low-cost index funds in the asset classes that you want, you will be in the 90th percentile of all investors. You're going to be at the top 10%. Will you be number one? No. I don't have to be number one.

I mean, I'm a good pickleball player. Really? I think I am. But am I number one? No. That's OK. I could be in the 95th percentile. I'll be happy with that. And I think the same way with our portfolios. We try to outperform. Odds are, high chance you're going to underperform.

It's going to cost you more money. And we're not even getting into the taxes of the turnover of going from this fund to that fund to this fund. So this is why we say at the Bogleheads, use index funds when they're available. Use them in every single asset class.

Don't worry about anything else. Just invest in a few good index funds. And that's it for me. you