Index investment is a strategy in which portfolios are created around a stock index, a benchmark or a market average.The idea is that, since most fund managers do not exceed the market, the optimum way to invest in a diversified portfolio is the following term passive investments, but there are a handful of reasons why some people believe that the average investor should completely avoid index funds.Here are five of these reasons.
Main learning points
- Index investment is a popular investment strategy, but there are also reasons why some investors may want to avoid index funds.
- Although indexes can be low costs and diversified, they prevent opportunities elsewhere.
- Moreover, indexes do not offer protection against market corrections and crashes when an investor has a lot of exposure to stocks index funds.
1. Lack of downward protection
The stock market has turned out to be a large investment in the long term, but over the years it has had its reasonable share of bumps and bruises.Investments in an index fund, such as one that follows the S&P 500, give the top when market goes well, but also makes you completely vulnerable for the disadvantage.
Investors with high exposure to stocks index funds can choosebindYour exposure to the index withDiscountThe S&P 500 Futures contracts or to buy a well setting against the index, but because they move in the exact opposite direction from each other, which they use together to defeat the purpose of investments (it is a break -strategy).Most cases covering is only a temporary solution.
2. Lack of reactive power
Index investment does not allow beneficial behavior.If a share is overestimated, it actually starts to bear more weight in the index.Unfortunately this is just when sharpInvestorsWould like to lower the exposure of their portfolios to this share.So even if you have a clear idea of a share that is overestimated or underestimated, if you invest exclusively through an index, you cannot act according to this knowledge.
3. No control over holdings
Indexes are setWallet.If an investor buys an index fund, he has no control over the individualHoldingsIn the portfolio.You may have specific companies that you like and own, such as a favorite bank or food industry that you have investigated and want to buy.In daily life you may have experiences that make you believe that a company is considerably better than another;Maybe it has better brands, management or customer service.As a result, you can invest specifically in that company and not in his colleagues.
At the same time you may have bad feelings towards other companies for moral or other personal reasons.For example, you can have problems with the way in which a company treats the environment or the products.You like it, but the components of an index are partly out of your hands.
4. Limited exposure to different strategies
There are countless strategies that investors have successfully used;Unfortunately it cannot give you access to many of these good ideas and strategies to buy an index on the market.Investment strategies can sometimes be combined to better give investorsRisk adjusted return.Index investment gives youDiversification, but it can also be obtained with only 30 shares instead of the 500 shares thatwould follow.
If you are doing research, it is bestInventory, bestThe growth layerAnd the best shares for other strategies.When you have done the research, you can combine them into a smaller, more focused portfolio.You may be able to give yourself a better placed portfolio than the overall market, or one that is better suited for your personal goals and risk tolerances.
5. Gedempted personal satisfaction
Finally, investments can be worrying and stressful, especially in times of market URO.You can constantly check selection of certain sharesQuotes, and you can keep you awake at night, but these situations are not averted by investing in an index.You can still constantly check how the market works and is worried about the economic landscape.And excitement of making good investments and being successful with your money.
it comes down to
There have been studies, both for and against active leadership.Many leaders do it worse than their comparativebenchmarksBut it does not change the fact that there are extraordinary leaders who are regularlyOvertakeThe market.Index investment has a profit if you want to take a broad financial point of view, but there are many reasons why this is not always the best route to achieve your personal investment goals.
