January 6, 2017

Why you should not invest in an index fund



Why shouldn’t long-term investors buy stock index funds?

First of all: Index funds are a good solution for long-term stock saving. However, they usually aren’t the best solution. The best solution is to manage your own, passive, long-term stock portfolio.

Why is this the case? There are three reasons why index funds aren’t the best solution for you.

First: Index funds cost money. If you give your money to a professional investor, he will charge fees of 1% to 2%. Even if you’re only saving a few thousand per year, it will amount to a few hundred thousand after 30 years, as much as a small house.

Index funds might be cheaper, but they still cost about as much as a nice car over time. Would you prefer to have this car in your own garage or in the garage of your index fund manager?

Second: Index funds have worse returns. You might not be aware of the fact that the stocks in an index fund are weighted. That means that if the price of a stock goes up, it receives a bigger share on the index fund. In other words, you will hold a larger number of expensive stocks than cheap stocks. This will eat up a part of your returns.

Third: Index funds carry risks. If you invest your money in an index fund, you don’t own the actual stocks, but rather a financial product. This is called counterparty risk.

If the index fund has a problem, you have a problem as well. If you buy and manage the stocks yourself, you don’t have this problem.



We buy the stocks we discuss and openly publish the returns of our portfolio. That's how much we believe in our stock research. Subscribe to the top 10 stocks for 100 markets conveniently by e-mail.

Get stock news now
Analysis drives Performance