All About Index Funds

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This book by Richard Ferri was published in 2002. It has similar information to the books by Swensen and Bernstein. We preferred the other books but Ferri does offer more information on implementing a strategy (including thoughts on defining investment goals).

Specifically, he gives good information on the following topics:

  1. The advantages of using low cost index funds and ETFs as the foundation of an investment strategy
  2. An overview of the common indices used in various asset classes (in 2002 at least)
  3. Guidelines for helping an investor define financial goals and determine an asset allocation mix that is appropriate for his horizon and objectives
  4. Tips on account operations

Specific tips

  • Consider tax swapping with ETFs or index funds to reduce your tax bill. When you incur a capital gain on an index fund during the rebalancing process, you should sell another index fund where you can realize a capital loss to cancel out the gain. Then, buy a similar index fund (based on a very similar index) to replace the shares of the sold index fund where the loss was incurred. Thus, you can limit your current tax liability. Note the sold and bought index funds do need to be based on different indices, otherwise, the IRS may consider it to be a wash sale.
  • Be thoughtful about how you use tax-free retirement accounts with regards to your asset allocation. Try to maximize the tax advantages of these accounts by using them to hold asset classes that are likely to incur capital gains or dividend distributions (treasuries, REITs, emerging markets, small value stocks, etc.).
  • Have dividends and interest payments from your taxable funds invested into a money market account then use those funds to perform rebalancing operations. This will result in a reduction in the number of sales of your funds that you will need to make. Thus, reducing the chance of realizing capital gains.