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5 Reasons To Avoid Index Funds

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  • 5 Reasons To Avoid Index Funds

    Modern portfolio theory suggests that markets are efficient, and that a security's price includes all available information. The suggestion is that active management of a portfolio is useless, and investors would be better off buying an index and letting it ride. However, stock prices do not always seem rational, and there is also ample evidence going against efficient markets. So, although many people say that index investing is the way to go, we'll look at some reasons why it isn't always the best choice.

    1. Lack of Downside Protection
    The stock market has proved to be a great investment in the long run, but over the years it has had its fair share of bumps and bruises. 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 also leaves you completely vulnerable to the downside. You can choose to hedge your exposure to the index by shorting the index, or buying a put against the index, but because these move in the exact opposite direction of each other, using them together could defeat the purpose of investing (it's a breakeven strategy). (To learn how to protect against dreaded downturns, check out 4 ETF Strategies For A Down Market.)

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    Cheers

    Marc
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