Okay, @tshile , here's the longer version.
Why those indexes: The CSRP and Bloomberg indexes are used because they are representations of the whole (U.S.) stock market and the whole (U.S.) bond market, respectively. That does not include international, but the results are the same.
You want to invest in total markets because of the way risk is compensated.
Basically, in the markets, people demand more return for riskier assets. This is why Greek bonds pay more than US Treasuries... if they returned the same, no rational person would buy the Greek bonds, because there is a much greater chance that they will default.
The thing is, the market does not compensate for risk that can be mitigated, because someone else that can mitigate that risk away and will accept less return in order to obtain that asset.
Single stock risk can be diversified away by holding many stocks. When Enron crashed, for example, it wiped out people that used to work there and had a huge chunk of Enron. People that held Enron in a total market fund, on the other hand, barely felt it. Diversification eliminated that risk.
We don't want to take risk we're not compensated for, so we don't want to hold individual stocks.
Individual stocks would be great if we could only pick Netflix (pre rise), but the research shows that stock picking is virtually impossible. I'd go further, but this post is already going to be long enough as it is.
Anyway, diversification is often called the only free lunch in investing.
So, one reason that the blog post I cited used those indexes is that the firm the CPA works for recognizes the research shows that market timing and stock selection are sucker's games, and promotes index funds.
The other reason is that research is a lot easier when you take the market as a whole, rather than presenting the results for each individual sector or stock. It holds up for sectors, though.
Why the theory predicts the data: To understand this, you need to understand a few terms first:
Annualized Returns is pretty obvious, it's how much you make per year.
Standard Deviation is a little more complicated, but as I mentioned earlier, it's the standard measure of risk in finance and economics. Basically it represents how wildly your returns vary, and obviously varying up is good, but varying down is scary.
Sharpe Ratio was introduced by William F Sharpe, a Nobel Laureate in Economics. It uses the previous two ideas to come up with a risk adjusted return rating. A higher Sharpe Ratio means you are getting more return per unit of risk.
Correlation Is how closely the returns of two assets follow each other. A correlation of 1 means that if you graphed the two assets, the lines would cover each other. -1 would mean they are exact inverses of each other. A low correlation means they don't act much like each other at all.
Modern Portfolio Theory was introduced by Harry M Markowitz, who won a Nobel in Economics for it. The details are also way beyond the scope of this post, but the part we care about is that it postulates that by holding assets with low (or, better, negative) correlations together, and rebalancing, the total portfolio can have a higher return than the individual parts would predict.
Anyway, theory predicts that bonds should have a low correlation with stocks, because they are different instruments. They are debt from a government or company, not ownership shares, and they are safer for a number of reasons, which are again beyond the scope of this post, but is why they pay less.
And, of course, the data bears that out too... The information in my last post showed a correlation of .2.
And that is why the data in my last post shows a fairly large increase in risk for a fairly small increase in return (a worsening sharpe ratio)... You're taking out an asset with a low correlation.
Obviously, the numbers look a little different depending on what time periods you use and which indexes you look at, but the theory has held up, more or less, for 60+ years.
You can read a little more about it here, with some of the math behind it: https://www.bogleheads.org/wiki/Risk_and_return#cite_note-34
One of the interesting effects of this at the other end, is that even though stocks are more risky than bonds in isolation, a 20/80 stocks/bonds portfolio actually is SAFER than 100% bonds, not just in Sharpe Ratio but in actual standard deviation.
Technically speaking, the best Sharpe Ratio is somewhere in the very low 20/80 area, but of course, you can't eat a Sharpe Ratio, so we are left with picking the lowest stock allocation that still accomplishes our goals, which is why most experts don't recommend going higher than like 80/20.
The other reason is that everyone thinks they have an iron stomach, but watching the portfolio drop in a crash can be hard, and having even a small slug of bonds that aren't falling 50% or more can provide reassurance as well as a place to rebalance from.