The case against index funds (like S&P 500)
In my previous trading post I was recommending taking your savings and investing them in stocks. And to minimize risk and effort, just put them in a so called "index fund", which is an aggregation of top stock. History shows that this strategy outperforms the market and any bank savings interest in the long run. But why?
Common sense would say that if a strategy to beat the market exists, then everybody would do it, pulling the market to the same level. The definition of "top" is also something nebulous that doesn't mean anything unless clearly defined. So here is a video that explains some of the shortcomings of the index fund. Basically:
- "top X" syndrome, where the items accepted as top are more discoverable, therefore performing better from sheer demand size
- wrong criteria for stock inclusion, where fundamentals lose to market demand and trading size
- fake diversity, where the X seems large, but most funds are based on a much smaller subset of stocks, with the rest having no impact
- exaggerated past, where a fund may have been defined a century ago, but came in actual use a lot more recently
Index Funds Are The Biggest Bubble Of Our Time (Hypothesis)
Also, there is a very interesting link that shows the constantly updated index funds may have performed worse than just investing once in a fixed number of companies, even if some of them have long disappeared.
Personally, I think that the gain in time you get by investing in a fund is worth the loss of efficiency. And there might not even be a loss, since until you create a diverse enough portfolio, chances are you are going to lose money, not make any. Keeping all of your savings in a bank is stupid, I am convinced of that! But that doesn't mean you should keep them all in stock (or in any one financial instrument). At this moment don't take my word for anything, but as soon as I gain more knowledge and confidence, I will post about trading and investing. At least it keeps things interesting.
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