Why Index Funds Are NOT the Best Answer

Indexing Is a Great Business…
But It’s a Lousy Investment

Vanguard wants you to “believe” in indexing. Your faith in indexing is the cornerstone of their business. But it’s a lie. And your trust could lead you to big losses. Here are six reasons why indexing is not the best answer

Myth #1: Index funds provide complete diversification.

Fair enough. If I own 5,000 stocks, that’s pretty darned diversified, in one sense.

But market-tracking indexes like the ones used as the basis for Vanguard 500 Index or Vanguard Total Stock Market are overwhelmingly large-cap, with 70% of their market weight represented by less than 10% of the stocks in the index. And the overwhelming majority of returns will come from the largest companies in the index, not the best companies.

Just because you have lots of companies in a fund doesn’t mean you’re diversified. Ask any of the 500 Index shareholders who lost 45% of their money in the bear market whether diversification protected them then.

Is your portfolio truly diversified? Find out here.

Next: Myth #2 – Index funds eliminate manager risk.