116

Welcome new user, I will take a crack at explaining this. It is a good question and it's a very common misapprehension. I think the shortest possible explanation is this: You see how you said "... a top company such as Apple ..." ... Forget 5 year. Here's a 25+ year chart of Apple: It barely tripled in 20+ years. What an absolute dog! Every day ...


48

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. ...


47

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 ...


45

Hindsight is 20:20. companies like Google, Facebook, Netflix, Amazon, Apple have all increased anywhere from 3x-6x in value in the past 5 years. ...while at the same time, companies like General Electric, Walgreens or Kraft lost a considerable amount of their stock value. How could you have known 5 years ago which companies would be "good" and ...


42

It really depends on what you mean by "hard to outperform the S&P 500". Consider a roulette wheel. In a certain sense, it's easy to make money at a roulette wheel. The strategy is very simple: if the wheel is about to come up red, then bet on red, and if it's about to come up black, then bet on black. You'll double your money! However, this ...


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), ...


32

Leverage can be good to increase gains, but it amplifies movements of a stock. Also downward movements. Paired with the increased gains is also an increased risk, and that changes the investment vehicle. The goal of an index fund is to passively follow an index as closely as possible. Leverage could reduce tracking error on upward movement, but would ...


28

First of all, insider trading is only illegal when you have material, non-public information that affects your trading decision. So if you do not have any pertinent information that could be considered the reason for your trade (i.e. you're making one-off trades and not part of a systematic trading program) then you'd be fine. As to whether it's a violation ...


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....


25

The US* and the rest of the world suffered a severe bear market in 2008-09. The very high returns in the years immediately after that represent the recovery from that market collapse (some of my own funds had a year or two of 20% or better returns). If you can't get older data for funds, try looking at general indexes (DJIA, S&P 500, etc.). For the US ...


23

Our thinking is that, if there's a long term market crash (e.g. Great Depression) and the value of our index fund plummets, People were having these exact same thoughts 10-11 years ago after the market fell due to the bursted real estate bubble. and we happen to have no job income for years, we'll need money to tide us over. Only making yourselves more ...


22

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

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 ...


21

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 ...


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 ...


20

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 ...


19

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....


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

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-...


19

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 ...


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

The stocks you mentioned are pretty good. So is a Nasdaq index fund, which has had double the returns of the S&P 500 over the past 5 years. The Nasdaq has a solid record of beating the S&P 500. If you'd invested in a Nasdaq index fund in 1997, by 2000 you'd have triple the gains of the S&P 500. (^IXIC: Nadsaq; ^GSPC: S&P 500) So it's ...


16

One aspect of the misunderstanding that no one has really mentioned yet: It seems like any reasonable person 5 years ago should have been able to realize that Google, Apple, et. al. would do well and buy accordingly. But that's not at all true, and there are at least 2 reasons: 1. In order for a stock to do really well, it's NOT enough that the company does ...


16

The weights of S&P 500 constituents are rebalanced quarterly (every three months). In between the rebalances, the ratio of index constituent weights may differ from the ratio of their actual market capitalization. The index constituent weights are fixed until the next rebalancing, but stock prices (and market capitalizations) will always fluctuate. Refer ...


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 ...


15

The currently accepted answer is incorrect. Vanguard is quoting the 1-year return as of 9/30/2019. This is calculated from the close of 9/28/2018 (the last trading day of September 2018) to the close of 9/30/2019. It is important to get the exact dates right because stock indices can easily rise or fall 1% or more in a day. Stock price fluctuations are ...


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