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Five Myths About Index Investing



March 08, 2017 – Comments (1) | RELATED TICKERS: VTI , SPY , VXUS

Index investing has become extremely popular in recent years. A lot of new investors have embraced the strategy in recent years. Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true. I am going to examine several of their problematic thought points, and discuss why they are myths that could hurt those investors in the future. In reality, there is nothing magical about index investing.

I will refute the five myths below:

1) Indexing is passive investing. 

Indexing is not passive, because there is a requirement for the investor to exercise judgment as to which index funds to select.  It then also imposes forced market timing through buying and selling of assets at certain time periods. In addition, the indexes themselves comprise portfolios of individual stocks or bonds which constantly add or remove components for a variety of reasons.

Index investors fail to understand the fact that an index is merely a collection of investments, that is actively selected by a group or a committee, using some sort of a quantitative or arbitrary reason. For example, the index committees on S&P 500 or Dow Jones Industrial Average make active component changes for various reasons. As you can see, an index investor actively chooses their funds, and then the funds themselves actively choose the components using some criteria. 


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1 Comments – Post Your Own

#1) On March 10, 2017 at 12:58 PM, Melaschasm (< 20) wrote:

A nice article. I am primarily invested in rental real estate and the S&P 500. I have been primarily invested in the S&P 500 since I left my first full time job, right after the .com bust, and transfered the horribly bad performing mutual funds that were available in my 401k. I remember asking that they add a S&P 500 fund because they did not have a single fund that had a better 5 or 10 year average than the S&P. During the 7 years I was investing in that 401k the returns on all of their funds were significantly lower than the S&P although the company match offset this poor performance, I could have accumulated much more money.

In my experience not investing enough money is the biggest problem for most people. Chasing last years best performers and a lack of diversification when buying individual stocks are two more really big mistakes I have often seen. Buying near market peaks and selling near market bottoms has been a problem with stocks, and an even bigger problem with real estate. 

I am hoping to sell some of my rental properties before the next recession and keep some of that money liquid to buy during the next market crash, but I will also be investing part of that cash because recessions are hard to predict. I do not recommend people try to time the market, but I will be doing so with a tiny fraction of my wealth because I have had much more success predicting macro economic trends than predicting individual stocks or even market segments.


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