January 20, 2017

Why your own stock portfolio gives you all the upside of an Index Fund

What advantages does your own stock portfolio offer compared to index funds? Index funds might not give you all the upside you think they do. This video explains why.

Firstly, an index fund doesn't represent the overall market. Even with the most well-known indices like the S&P 500 or the FTSE 100, you will be exposed to the growth of the entire market. They only represent those companies that have gone public, and the largest ones at that.

Secondly, an index is weighted by company size. That means an index is much more concentrated than the true economy. Plus, it's usually concentrated towards the industries or companies that are currently in favor, namely those that are also more expensive.

Thirdly, since an index doesn't give you the full upside of the market, you may just as well select a diversified portfolio of stocks and have a similar upside potential.

No one knows which parts of the market will have the most upside, not even an index fund. So, you might as well save yourself the fees and select your own diversified, buy-and-hold stock portfolio.

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