Money Magazine's Epiphany: Buy and Hold Index Funds!

The January issue of Money magazine contains their annual "Investors Guide" section.
The introduction to the section is an acknowledgement that it is nearly impossible to time the market or to beat the market through superior stock picking.
Money magazine is now recommending a buy and hold strategy with the use of index funds as the core to most peoples long term investment strategy.

For those familiar with this blog and familiar with my advise, this should not be new news.
For those familiar with academic studies on the market, this news is well over 50 years old.
Note: A great book outlining the history of academic study in this area is "Capital Ideas: The Improbable Origins of Modern Wall Street" by William Bernstein:

http://www.amazon.com/Capital-Ideas-Improbable-Origins-Modern-ebook/dp/B00BV7MN7O/ref=sr_1_1?s=books&ie=UTF8&qid=1389704240&sr=1-1&keywords=capital+ideas

A good adviser will not sell you on the idea that he can beat the market on a "risk adjusted" basis. Rather the good adviser will focus on what allocation of stocks and bonds are best for your situation, how much you need to be saving, how to minimize taxes, and finally the adviser should have a very good understanding of capital markets and human behavior so they can be your guide and therapist when the road gets rocky.

Here are a couple excerpts (the highlights are mine):

(Money Magazine)

Here are just a few of the ways Wall Street pros try to eke out an edge in the market. You can't do any of them:

With a subscription to the Bloomberg online news service (price: about $20,000 a year), traders can instantly see anything from the location of oil tankers around the globe to supply-chain maps of a company's vendors and customers.

Hedge fund managers who invest in drug and technology companies tap into "expert networks" of executives and scientists paid for their specialized knowledge. In some cases, it's been charged, traders have also illegally gotten inside information through these contacts.

Half of stock trades are made by automated "high-frequency" programs; it takes 7/10,000ths of a second to buy or sell on the New York Stock Exchange, says the Tabb Group, down from a horse-and-buggy 10 seconds eight years ago.

You can't get a jump on this crowd. You can't even compete with them. Chances are, the professional managers you hire via a mutual fund, for 1% of assets or more per year, won't be able to stay ahead either.

In October, Ray Dalio, one of the most successful hedge fund managers in the world, told a conference audience that "going forward, most investors are not going to be able to produce alpha." "Alpha" is finance jargon for outperforming the market after accounting for risk. In truth, the search for alpha has always been something of a snipe hunt; the word was first used in a 1967 article that showed that most mutual funds didn't deliver it, especially after subtracting fees.

Two things have changed since then: More pros admit the alpha game is over, and perhaps more important for you, investing has never been better for those willing to stop playing. In the words of Tadas Viskanta, editor of the finance blog Abnormal Returns, there's wisdom in reaching for "investment mediocrity."

Today, just as in 1967, most professionals can't beat an index that tracks the stock market. "The paradox," says Viskanta, "is that the less effort you put in, the better off you are." And recently, he notes, perfect mediocrity has grown more attainable, as index-based investing has moved steadily closer to free.

For as little as 0.04% of assets per year -- that's $4 for every $10,000 you've invested -- and often with no broker commission, you can buy an exchange-traded fund, or ETF, that follows most of the U.S. stock market and delivers its return.

This year's Investor's Guide starts from the idea that index funds and a buy-and-hold stance should be the default approach for long-term wealth builders. With that in mind, MONEY has rebuilt our basic investing tool set: Our list of recommended funds is now the MONEY 50, streamlined from 70. Not all the funds are index trackers, but the core choices are low-cost, highly diversified portfolios for the long run. For many investors, a portfolio balanced among one broad U.S. stock fund, an international fund, and one or two bond funds is all you need. The MONEY 50 makes building that portfolio easy.
       
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OWN THE WORLD, FOR NEXT TO NOTHING

You can build a solid portfolio with just three investments. Here are examples using ETFs and index mutual funds:

The ETF route:
Schwab U.S. Aggregate Bond (SCHZ): 40%
Schwab U.S. Broad Market: (SCHB) 40%
Schwab International Equity: (SCHF) 20%

The index fund route:
Vanguard Total Stock Market Index: (VTSMX) 40%
Vanguard Total Bond Market Index: (BND) 40%
Vanguard Tax Managed International (VDVIX): 20% 

Either way you go, your costs will be far, far less than most active fund managers charge...

Annual fee:
ETF portfolio: 0.05%
Index fund portfolio: 0.08%
Three average active funds: 1.22%

... and you'll be diversified across the globe.

Number of stocks:
ETF portfolio: 3,144
Index fund portfolio: 4,823
Three average active funds: 289

SOURCE: Morningstar