It seems like these days, when it comes to investing, all you hear about are index funds. People talk about how easy they are to invest in, how safe they are and of course the great returns you will receive if you place your money into them. Many people hearing this advice would probably assume that this is the perfect financial instrument however, more savvy investors know better. No financial instrument is perfect which is why I want to share with you 5 reasons someone would want to avoid investing in index funds!
For those who aren’t aware, an index fund is an Exchange traded Fund (ETF), having a portfolio designed to match or track the components of a financial market index. This is typically the Standard & Poor’s 500 index, more commonly referred to as the S&P 500. Generally, an index fund provides low operating expenses, broad market exposure, and low portfolio turnover. Regardless of the state of the market, it allows for their benchmark index. Warren Buffet, who is a renowned investor has spoken of how index funds are a haven for saving for the sake of a person’s older years.
As I previously mentioned, thanks to modern portfolio theory, index funds seem to be all the rage these days. The modern portfolio theory holds that markets are efficient, and that a security’s price includes all available information. For this reason, some advocates are of the opinion that active management of a portfolio is useless, and it would be better if investors buy an index and go along for the ride. However, stock prices, in many cases can be very irrational, and there is also enough evidence that goes against efficient markets. So, although many people say that index investing is the way to go, I’d like us to take a look at some reasons why it may not always be the best choice.
Reason #1: Vulnerability In Economic Downturns
The stock market as we all know, has done a lot to prove that it’s a worthy investment in the long term. However, it has had its fair share of economic troughs. Investing in an index fund, such as one that tracks the S&P 500, will give you the upside when the market is doing well, but it can also leave you vulnerable to the downside.
You have the option of hedging your exposure to the index by shorting the index, or purchasing a…