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In a recent infomercial (dated Sept 24, 2012), Bogle touts the advantages of bond index funds.

Bond index funds as a group now claim a record high 17 percent market share among taxable bond funds—$370 billion of the $2.4 trillion total. What’s more, during 2011, bond index funds accounted for fully 40 percent of the investor cash flow into taxable fixed-income funds as a group…. If there is a weakness to the case for the all-bond-market-index funds, it is that Barclay’s Aggregate Bond Index itself is so heavily weighted by U.S. Treasury and agency securities and federally backed mortgage bonds (GNMAs)…. So it’s time to create yet another bond index fund, a Total Corporate Bond Index Fund. Its estimated yield in September 2012 is 3.0 percent, versus 1.7 percent for the Total Bond Market Index Fund. A corporate bond index fund would be useful to investors who require higher income without assuming undue risk. An investor who transferred, say, half of his bond holdings in the total bond index portfolio into an investment-grade corporate bond portfolio would still have a 35 percent position in U.S. government securities. As low interest rates continue for the foreseeable future, and spreads between corporates and Treasurys [sic] remain at current levels, it can only be a matter of time until a total corporate bond index fund is made available to investors.

In fact, if you dig though the ETFs that hold bonds, such an index can be found or is easy enough to put together by combining two or more bond ETFs. Also, it doesn’t take much money or effort to put together what amounts to your own ‘total corporate bond index fund’ just by buying your own bonds in a disciplined, consistent manner. If you do choose that path, you’ll also discover that your returns can easily beat those of Vanguard’s.

….Vanguard Total Bond Market Index Fund has fully measured up to its performance potential. It’s [sic] now 25-year lifetime rate of annual return averaged 6.9 percent, a nice margin of 1.2 percentage points over the average 5.7 percent rate of return of its taxable peers.

A mere 6.9%? Most of that gain will be taxed at ordinary-income rates, and when a realistic rate of inflation is subtracted, you’ll discover that owing that fund has failed to preserve your purchasing-power. Yeah, you might have made a nominal 6.9% if you got your timing correct, which the Dalbar studies document that average investors won’t due to their propensity to buy into index funds at market tops and to sell them at market bottoms, thereby under-performing the index by as much as 85% over 20-year periods, which really creates some serious losses of capital/purchasing-power.

There’s a time and purpose for indexing. In bull markets (I.e., Stage Two markets), the returns offered by indexing are all but impossible to beat without using leverage and/or exquisite market-timing, both of which are far beyond the abilities of most traders, much less nearly all investors, to employ effectively. But over a full cycle of market stages (Google the term), even the dumbest of investors can beat the indexes by several hundred basis points if they do their buying when it should be done and then don’t panic out of their patiently-acquired positions. How to know when and how to buy? Ben Graham lays it out quite clearly in his classic intro to value-investing.

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