Investing, President-Style

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Published May 20, 2013

| Bankrate.com

The White House on Wednesday released the president and vice president's financial disclosure forms, which cataloged the top executives' -- and their spouses' -- investment picks, among other financial interests.

President Barack Obama favors index funds for his retirement plan. In addition to the defined benefit pension plan from the State of Illinois General Assembly, the president holds shares of Vanguard's 500 Index Fund for retirement.

Additionally, the Obamas have 529 plans to fund the educations of daughters Malia and Sasha.

Index funds for everyone

Index funds are growing in popularity. Last year, they made up 24% of total assets under management, growing four times faster than all other funds, according to the PBS Frontline production "The Retirement Gamble" and Morningstar.

The secret is the low cost. Indexed mutual funds simply follow market indexes, giving investors very close to whatever the market returns, minus fees. Actively managed funds try to outperform the market, so they tend to cost a little bit more for all the research and analysis that goes into finding investments that will outperform. For an investor in an active fund to beat a passive fund, the active fund has to beat the benchmark index plus return the cost of fees. Some actively managed funds do that, but many don't.

"One of the more popular benefits of many index funds is that there are no front- or back-end loads or sales charges, and annual expenses can be dramatically lower," says Robert Laura, co-founder of RetirementProject.org.

"Index funds, as well as low-cost (exchange-traded funds), have become a growing part of people's portfolios and retirement for the simple fact that it is very difficult, some would say impossible, to outperform the markets on a regular basis," he says.

There are good uses for actively managed funds, but keep an eye on fees instead of focusing solely on returns.

If index funds are good enough for someone such as the president of the United States, maybe they should be in more portfolios. Of course, with a lifetime pension headed his way after leaving office, the president hardly needs to invest at all. The Former Presidents Act gives each past president a taxable pension equal to the annual rate of basic pay for the head of an executive department, which, as of 2008, was $191,300.

What do you think of index funds?

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