Index Fund Tweaking

Jonathan Clements of The Wall Street Journal explores the index-fund-beating strategy of Robert Arnott, chairman of Research Affiliates in Pasadena, California, in this article from The Morning Call. Arnott says index funds invest too heavily in overvalued companies, and he believes a better strategy is to invest in companies based on the size of their business. "To that end, he advocates weighting stocks using ''fundamental'' yardsticks such as sales, cash flow, dividends and book value," reports Clements. According to the article, while this approach has outperformed traditional index fund investing over the longer term (by two percentage points a year over the past 43 years), there have been periods of significant underperformance, and there is also the matter of higher investment expenses of implementing the strategy.

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(May '04-Jun '05)