Indexing is King - But What Index?-SaveMoneyGuides.com
The Author
Hey, my name is admin, and I first published 'Indexing is King - But What Index?-SaveMoneyGuides.com' on 27th July, 2008, within the Stock section.
From-SaveMoneyGuides.com-There is widespread agreement that index (tracker) funds produce superior returns to the average actively managed fund. That is, if you invest in a tracker you’ll most likely make more than if you invested in active management. It must be said that some active funds do beat the index; the problem is they can’t be identified in advance. Trying to find them is akin to playing roulette. The corollary of this is that the bulk of your stock portfolio be held in index tracker funds or Exchange Traded funds (ETFs).
To make life interesting you might want to keep a small percentage (say 10-20% maximum) for individual stock holdings. Pick the stocks yourself and purchase through a low-cost execution-only broker. But treat this part of your investing as a bit of fun. If you can beat the index - great - you’re doing better than most professional managers. But don’t be disappointed if that portion of your investments underperforms.
How to index?
There are two criteria in deciding a fund or ETF. 1) Minimize charges, charges serve only to damage your wealth. Make that damage as little as possible. 2) How closely does the fund track its index? Choose funds that have been around awhile and have some past data.
So that’s investment sorted. Or is it?
Not quite, because once you’ve seen the light on indexing the vital question becomes which index(es) to follow? Should you follow a narrow index eg the Dow Jones Industrial Average, or a broader one such as the S&P 500? Should you limit yourself to your domestic market, or allocate a proportion of your funds to overseas markets? Should you stick to the major economies or get some exposure to the higher risks and potential rewards of emerging markets?
In addition to stocks there are also bond index funds, real estate index funds, commodity index funds… that you may want as part of your portfolio.
Here’s an example portfolio - yours may of course differ. And remember, these funds are after you’ve put 3-6 months living costs aside in a high-interest easy-access cash account.
50% broad domestic stock index, eg S&P 50015% real estate
15% overseas stocks - developed world
10% overseas stocks - emerging markets
10% individual stocks (this is your bit of fun - if you want)
If you’re the cautious type, pessimistic about stocks, or if you’re nearing retirement, you might want to hold some bonds.
The reason for diversification is to reduce risk. When one market isn’t doing so well, chances are other markets/sectors are doing better, so your downside is diluted. Also by spreading your assets you increase your chances of benefiting from the success stories.
Spend a few minutes a day keeping up to date with business & economic news. review your allocations from time to time, but remember the stuff you hear on the news is already factored into the markets - probably before you even get to hear it. So try to extrapolate forwards from what you’re hearing and base your allocations on what you think the future holds.
