No. of Recommendations: 2
Scott Burns Sunday column in the Dallas Morning News discusses super-diversified portfolios with 12 to 14 index funds.

As their book title, Wealth Without Worry, suggests, James N. Whiddon and Lance Alston are doing just fine, thanks.


In their book, they point out that a simple diversified index portfolio consisting of four basic index funds (20 percent S&P 500, 20 percent Russell 2000, 20 percent MSCI EAFE and 40 percent Lehman intermediate government bond) would have returned 12.7 percent a year during the 25 years from 1979 through 2004.


Mr. Whiddon and Mr. Alston, however, believe they can beat even simple indexing by using institutional asset class index funds from Dimensional Fund Advisors. The Santa Monica, Calif., firm has deep academic roots in the research of Rex Sinquefield, Eugene Fama and Kenneth R. French.

This research shows that it is possible to increase portfolio returns by investing in small cap stocks and "value" stocks with low price-to-earnings and price-to-book value ratios.

The financial planners' 80:20 Market Return Portfolio consists of seven asset class funds, including small cap, real estate and emerging market indexes. Only 20 percent is committed to fixed income.

Although the simple index fund portfolio crushed the returns earned by active managers, the Whiddon/Alston model portfolio was returning a whopping 14.29 percent. And it did it with less market risk.


How can this happen?

Mr. Whiddon attributes the superior performance to several factors: (1) relatively low costs, (2) asset class funds that contain over 15,000 securities compared with fewer than 4,000 securities for a typical index fund portfolio and (3) such broad diversification that downside risk is muted.

During a recent interview, he called it "super-diversification." He said that, in practice, portfolios were constructed with 12 to 14 asset classes.


The authors have long passages from their book available for free on their web site.

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