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index funds are good

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Lately I’ve been hanging out at the forums on money saving expert. As I mentioned in my review, IMO they aren’t the best feature of the site, in part because the articles are so good, but also because two or three prolific members hate index funds.

I probably shouldn’t pick on them, but i will anyway. Their main arguments seem to be thus:

  1. a FTSE All-Share tracker is not sufficiently diversified
  2. a tracker will not beat the average in its sector by design
  3. if the market crashes by 40% you will lose money

I say that they are wrong. In answer to these points I have my own:

  1. no single fund is truly diversified but a FTSE All-Share tracker is well diversified in its sector (since it holds shares in all the companies in its sector)
  2. a tracker will by design perform no worse than average
  3. if the market crashes you will probably lose money anyway, this is why you invest over a 10 year time period

Its been stated before, but index funds have another huge advantage: they are cheap.

One of my biggest complaints about the index fund naysayers is that they often state that pursuing average returns is a poor idea. Quite frankly, I doubt my ability to consistently pick a fund that will perform above average when professional fund managers cannot pick stocks and shares that perform above average. Therefore I go for the simpler option, I simply go for the average - note that I’m not aiming for the average, I’m actually getting the average in my sector (minus fees, which as stated above, are low). I think that’s a perfectly reasonable strategy.

 If you are earning and investing in £ sterling, you could do a lot worse than make use of an index tracker like a FTSE All-Share tracker for your UK Equities investments. They’re cheap and they won’t perform worse than the average.

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3 comments for “index funds are good”

  1. I believe index funds are a good anchor for your portfolio. I firmly believe in small caps stocks, and my success with them has tempted me to go in full bore and inveset all my money in them.

    No no, must stay anchored. Index funds are cheap, tax efficient, and are a good anchor for my portfolio - I could do something very stupid with my stock picks, but there is nothing stupid I could do with an index fund like SPY.

    Posted by Q at $1 Million to My Name | May 31, 2007, 8:57 pm
  2. It is hilarious to read that a criticism of passive index funds is that they do no better than average, which is what they are specifically designed to do. That still beats all but a handful of actively managed funds over an extended period like a decade due to the fees and costs of the actively managed funds. It’s the same in Canada, the US, the UK, anywhere the sibject has been examined.

    Posted by CanadianInvestor | February 15, 2008, 10:17 am

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