|
|
Oh geez, not another 'How To Invest' article....My assumption is that if you’ve made it this far into the website, then you’re at least familiar with indexing as an investment strategy. If not, then read no further – the rest of this article won’t mean much to you. Come back and finish this up after you’ve done a Google search for ‘index investing strategies’. That should return no less than about a trillion sites, which is more than enough to get you acquainted with the indexing philosophy.If you are familiar with indexing, then thank you in advance for indulging me. Remember when your broker explained ‘why indexing’? The theory actually made a lot of sense - most professionals don’t beat ‘the market’, nor do most amateur investors. So, why fight the odds? Just buy into an S&P 500 index fund (or exchange traded fund) and leave it alone. Given enough time, you’d surely earn annual returns ranging anywhere from 8% to 13%, depending on how you did the math. But here’s the one I liked – with indexing, you’re guaranteed never to under-perform the market. Well, that’s true. But as a former broker who extensively used indexing strategies, I can tell you this....they’re not advocating indexing because they’re your buddy. By insuring that you never under-perform the market, they’ve also insured that you’ll never even question the advice. And as long as you don’t do that, you’ll always be a client of theirs. Oh yeah, they’ll scrape a little bit of a fee out of the expense ratio each and every year they have you in an index. The fee is tiny to you, and even tinier to them. But considering they have absolutely no ongoing work to do, it’s a case of ‘something for nothing’ for the broker. But you know what? That’s not even the point of my rant. My issue is far greater than that. Ladies and gents, they have you in the wrong index. That’s right. Based on the needs and goals you voiced to your ‘advice giver’, I’m going to bet that they put 95% of you guys and gals in a fund designed to mirror the most common of all indexes….the S&P 500. Well guess what folks – you would have been far better off in a small company index. How much better? If you had a choice of a small-cap index or a large-cap index back in 1925, and if you chose the small-caps then, today you’d be more than twice as well off (assuming reinvestment of gains and dividends, and not accounting for taxes). Yep, the small-caps completely pummeled the large caps. And you know what else? The small-caps are going to keep on trouncing the large-caps. Does your broker know this? Probably. They should know it, anyway (and I’d be worried if they didn’t). But it’s not like they don’t have a counter to the argument for small-caps. In fact, I’m going to bet you could make the counter-argument for your broker – the volatility is way too much to stomach. This is where I start to get upset. The volatility in the small-caps (on a daily basis) can feel greater than the ebb and flow for the large caps. But on a five-year basis, the small-caps are actually less volatile than the larger companies. And here’s the real frustration (for me anyway)....there hasn’t been a five year period in history where the large-caps have outperformed the smaller companies. Yes, there have been two and three year periods where it’s happened, but never a five-year period. So five years isn’t your timeframe? Folks, if you’re in an index fund of any sort, then your timeframe is at least five years. That may not be what you said to your broker, but that’s what he (or she) heard, because that’s the kind of investment you’re holding. Am I saying to go out tomorrow and fire your broker? Nope. In fact, if they were wise enough and concerned enough (and weren’t ego driven), then I admire the fact that they were willing to put you in an index. I’m also willing to bet that the brokerage firm itself encourages the strategy too. And quite frankly, despite some fundamental problems I have with the strategy, I really do believe that indexes have at least some role for almost all portfolios. When I was a broker, I encouraged the same strategy, partly because that was the company’s party line, and partly because that’s the only thing I felt comfortable doing with some clients. I’m just saying that most investors and brokers alike have wrapped their arms around a philosophy, without really knowing all the real motivations behind it. So then am I saying go out and put everything you own in the S&P 600? Again, no. But I am saying if your timeframe is being measured in years, and you really are looking for growth, then you’re missing the best opportunities. Without knowing your personal situation, it’s impossible to say ‘how much’ small-cap indexing you should do. But if you already have large-cap indexes represented in your brokerage accounts, then by default, you’re a candidate for adding smaller companies to your mix. Whew! OK, I promise to return to my more even-keeled, objective views and style. I just had to get this off my chest in a way that clearly expressed how I felt. Thanks for letting me. By the way, yes, we do have a bias for small-caps in most of our portfolios. For our indexing-only clients, we use S&P 600 and Russell 2000 funds. For our stock portfolios, we look for smaller companies that are likely to become large companies in the near future.
Not everyone is aware of what is a student loan? Student loans, as the name implies, are available to students who require help with living costs while studying. Student loans are part of the government's financial support package for degree only students embarking on a course of higher education. For most students, a student loan is their largest single source of income. So unless you have ve. . .
More Finance Investment Links
|
|
