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44

A great deal of analysis on this question relies on misunderstandings of the market or noticing trends that happened at the same time but were not caused by each other. Without knowing your view, I'll just give the basic idea. The amount of active management is self-correcting. The reason people have moved out of actively managed funds is that the funds ...


43

I actually love this question, and have hashed this out with a friend of mine where my premise was that at some volume of money it must be advantageous to simply track the index yourself. There some obvious touch-points: Most people don't have anywhere near the volume of money required for even a $5 commission outweigh the large index fund expense ratios. ...


37

It's very simple. The low cost index funds are generally the best investments for investors, but - because of the low fees and the fact that the offerings of different companies are nearly identical - they are the worst for the investment houses. Therefore, the investment houses spend a lot of money convincing investors to choose other funds. If you ...


34

Why would it not make more sense to invest in a handful of these heavyweights instead of also having to carry the weight of the other 450 (some of which are mostly just baggage)? First, a cap-weighted index fund will invest more heavily in larger cap companies, so the 'baggage' you speak of does take up a smaller percentage of the portfolio's value (not ...


32

Why do banks loan money to people (for housing, cars, etc.) at 4% and below ? Because loans for specific items are "secured" against those items. You don't pay on that car loan, the bank comes to take the car. There's far less risk to lenders if they lend money for a car (and put their name on the title, and in the case of a car actually hold the title), ...


27

As has been pointed out, one isn't cheaper than the other. One may have a lower price per share than the other, but that's not the same thing. Let's pretend that the total market valuation of all the stocks within the index was $10,000,000. (Look, I said let's pretend.) You want to invest $1,000. For the time being, let's also pretend that your purchasing 0....


23

The S&P 500 is a stock market index, which is a list of 500 stocks from the largest companies in America. You could open a brokerage account with a broker and buy shares in each of these companies, but the easiest, least expensive way to invest in all these stocks is to invest in an S&P 500 index mutual fund. Inside an index mutual fund, your money ...


22

Index funds may invest either in index components directly or in other instruments (like ETFs, index options, futures, etc.) which are highly correlated with the index. The specific fund prospectus or description on any decent financial site should contain these details. Index funds are not actively managed, but that does not mean they aren't managed at ...


21

Index funds are well-known to give the best long-term investment. Not exactly. Indexes give the best long term performance when compared to actively managing investments directly in the underlying stocks. That is, if you compare an S&P500 index to trying to pick stocks that are part of it, you're more likely to succeed with blindly following the index ...


21

Risk is the problem, as others have pointed out. Your fixed mortgage interest rate is for a set period of time only. Let's say your 3% might be good for five years, because that's typical of fixed-rate mortages in Canada. So, what happens in five years if your investment has dropped 50% due to a prolonged bear market, and interest rates have since moved up ...


21

They are distributed to investors much like any other mutual fund, same thing with capital gains, although those distributions tend to be lower in value. Here is some info from the Fidelity S&P 500 fund: Note that you may not see the dividends in your cash account because they are typically reinvested. In Fidelity, the default is to reinvest ...


20

Hope springs eternal in the human breast. No actively managed fund has beaten the indices over a long period of time, but over shorter periods, actively managed funds have beaten the indices quite often, sometimes quite spectacularly, and sometimes even for many years in a row. Examples from the past include Fidelity Magellan and Legg Mason Value Trust. So ...


19

It's not just about the ethics of investing in these companies. What if you believe (either hypothetically or with supporting evidence) that companies that show good environmental and social citizenship will tend to perform better that those that do not? Then you would consider a fund that is based off of high ESG ratings to be a good investment. The ...


19

There are several things to keep in mind: First, as Dilip's answer says, there are many indices, with different aims, so the number of "hot" stocks that someone would need to potentially target is much larger than your question suggests. Even if you can whittle this down to a small number of (potential) "core" targets, however certain an "anticipatory ...


18

Why not figure out the % composition of the index and invest in the participating securities directly? This isn't really practical. Two indices I use follow the Russell 2000 and the S&P 500 Those two indices represent 2500 stocks. A $4 brokerage commission per trade would mean that it would cost me $10,000 in transaction fees to buy a position in ...


18

A suitable mix of index funds IS a great option if you don't want to spend a lot of time and effort micromanaging your money. If you find amusement in pushing numbers around, you may be able to do better. Notice: MAY. If you have multiple millions, you can hire someone of that sort to push the numbers around for you. They may do better for you. Notice: MAY....


18

Why does the bank not invest their money in the stock market rather than loaning it to people? (Aside from other points made about secured vs unsecured loans and regulations) As to why your local, commercial bank doesn't, it's because they aren't structured to do so. Mixing "commercial" and "investment" banking was illegal up until about 20 years ago (US-...


17

Summary When you invest in an S&P500 index fund that is priced in USD, the only major risk you bear is the risk associated with the equity that comprises the index, since both the equities and the index fund are priced in USD. The fund in your question, however, is priced in EUR. For a fund like this to match the performance of the S&P500, which is ...


17

Rules of thumb? Sure - Put down 20% to pay no PMI. The mortgage payment (including property tax) should be no more than 28% of your gross monthly income. These two rules will certainly put a cap on the home price. If you have more than the 20% to put down on the house you like, stop right here. Don't put more down and don't buy a bigger house. Set that ...


17

Picking yourself is just what all the fund managers are trying to do, and history shows that the majority of them fails the majority of the time to beat the index fund. That is the core reason of the current run after index funds. What that means is that although it doesn’t sound so hard, it is not easy at all to beat an index consistently. Of course you ...


17

Can I invest in S&P500 Index fund, while residing in India You can invest in US funds. Under the Liberalized Remittance Scheme one can invest up to USD 250,000 per year. Option 1: Open an account with an international broker. This is time consuming and KYC etc would take time. Transferring funds will also involve a bit of paperwork. You can then invest ...


16

In a cap-weighted fund, the fund itself isn't buying or selling at all (except to support redemptions or purchases of the fund). As the value of a stock in the index goes up, then its value in the fund goes up naturally. This is the advantage of a cap-weighted fund, that it doesn't have to trade (buy and sell), it just sits on the stocks. That makes a cap-...


15

Couple of clarifications to start off: Index funds and ETF's are essentially the same investments. ETF's allow you to trade during the day but also make you reinvest your dividends manually instead of doing it for you. Compare VTI and VTSAX, for example. Basically the same returns with very slight differences in how they are run. Because they are so ...


14

TL;DR I don't like your strategy. Don't wait. Open an investment account today with a low cost providers and put those funds into a low cost investment that represents as much of the market as you can find. Details I am going to start by assuming you are a really smart person. With that assumption I am going to assume you can see details and trends and ...


13

Congratulations on deciding to save money and choosing to invest it. One thing to know about mutual funds including index funds is that they typically require a minimum investment of a few thousand dollars, $3000 being a typical amount, unless the investment is in an IRA in which case $1000 might be a minimum. In some cases, automated monthly investments of ...


12

There still is some buying and selling to do in a passively-managed fund. The stocks might pay dividends. If the fund manager didn't reinvest these dividends, the fund would begin to accumulate a cash position, which would cause it to stray from being an index fund. Stocks come and go from an index as well; if the fund is to maintain a composition that ...


12

Funds which track the same index may have different nominal prices. From an investors point of view, this is not important. What is important is that when the underlying index moves by a given percentage, the price of the tracking funds also move by an equal percentage. In other words, if the S&P500 rises by 5%, then the price of those funds tracking ...


12

If you hold a stock in a company you stand to benefit directly from the activities of the company via dividends or stock buy backs. You also benefit indirectly from the company's profitability. The stock price of a company will tend to be correlated with its profitability, since there will be more demand for the stock in attempt to capture a slice of the ...


11

With regard to commodity futures, a paper released in January 2010 by Aulerich, Irwin, and Garcia, concluded that index funds have essentially no impact on commodity futures. Looking at stocks, a stock that gets included in a major index does increase in price. It increases its turnover by 27% and increases its price by between 2.7% and 5.5%, according to ...


11

I hope a wall of text with citations qualifies as "relatively easy." Many of these studies are worth quoting at length. Long story short, a great deal of research has found that actively-managed funds underperform market indexes and passively-managed funds because of their high turnover and higher fees, among other factors. Literature Longer answer: Chris ...


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