What are the arguments against index investing?

[Sotnis]

What are the arguments against index investing?

This debate is often framed in an either/or manner - indexers vs. stock pickers. If you look at it that way, the academic literature appears clear that it's extremely difficult for active portfolio management to outperform indexing over longer stretches. So it's hard to make a case for most current types of active management (eg. actively managed mutual funds) for most types of long-term investors.

I am curious to hear what the other side has to say.

(This is a follow-up question to the previous post on this board.)

 

[Vincent S. Ashmore]

Indexes are set portfolios. If an investor buys an index fund, he or she has no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy. Similarly, in everyday life, you may have experiences that lead you believe that one company is markedly better than another; maybe it has better brands, management or customer service. As a result, you may want to invest in that company specifically and not in its peers.
it's better to walk your own path IMHO

 

[Michael J. Fletcher]

Indexes suck, really,

Indexes are set portfolios. If an investor buys an index fund, he or she has no control over the individual holdings in the portfolio. You may have specific companies that you like and want to own, such as a favorite bank or food company that you have researched and want to buy. Similarly, in everyday life, you may have experiences that lead you believe that one company is markedly better than another; maybe it has better brands, management or customer service. As a result, you may want to invest in that company specifically and not in its peers.
it's better to walk your own path IMHO

You have a point, I don't like indexes too, 'cause they don't give you a real freedom of choice, though it's better than buying actively managed mutual funds.In a nutshell it all depends on your strategy, and time what you want to spend. Index funds are great for those, who don't want to spend their lives at the monitor while trading.

 

[ETcallhome]

I can argue for
very few have enough money to buy 500 stocks
your chances of picking the one stock that will outperform the index is about 1 in 500
after you own more than about 5 diversified stocks you end up performing about like the index.
low cost practically no cap gains

put 50% in SPY and see if you can beat it with the other half (85% of all pro money mangers can't beat it and the 15% that do rotate every year, only 5% have beat it 5 years in row)

 

[Phill Twist]

The most common argument is that, long term, funds' average return in any asset class doesn't beat their respective index, while index funds have low cost (and are often more tax efficient due to lower trading).

 

[Jamie J.]

The main disadvantage is that any index fund may remain in the leaders for a short while. Because of it, you have to choose the other one. And it puts to trouble as we want a permanent income from our investments.

 

[lawrence-lugar]

I personally find it easier to trade and read and predict the movement of a broad index like the SPY and DJIA.-- individual stocks are more prone to erraticness and other b*tchy issues.

 

[zdreg]

"I have a fat ego and can outperform any damn index."

 

[botpro]

I personally find it easier to trade and read and predict the movement of a broad index like the SPY and DJIA.-- individual stocks are more prone to erraticness and other b*tchy issues.

In other words: since an index is the aggregate of many stocks, it follows that it is less volatile than its individual constituents.
Btw, it is possible that one can also build his own index... ;-)
Trading that index is of course not easy, but it is possible, simply by trading the individual parts. But for retail traders it's not recommended due to the additional costs and work.
Most ETF's work that way, internally.

 

[smili]

What are the arguments against index investing?

One of the best arguments imho is that there is really only one index - a single global, whole world, cap weighted index. Any deviation from that is necessarily an "active" choice as to allocation. So to the degree that we deviate from that global index, we are all "active" investors.