Question:
I read an article online that suggested Index funds for beginners. The author feels that if I just invest in index funds that I won’t have to learn anything about the stocks, fund managers or performance. They just track an index. Market does well, so do I. They’ll outperform, they’ll have low fees, and they’re often tax efficient. So why go any further?
Answer:
When it comes to investing, if you want to “do it yourself,” yes, you can buy an index fund and track the market. You may do better on the upside, but you may also do worse on the downside. For example, during the tech bubble, 33% of the S&P 500 was in technology stocks. When the tech bubble burst, S&P 500 index funds went down significantly. Active managers tend to do better when the market doesn’t do well.
Additionally, you still need to answer the questions of how much you should have in fixed-income investments, how much of your portfolio should be in stocks and how do your investments fit with your overall plan. In our opinion, when you leave stocks and begin to look at other investments, you shouldn’t rely on index funds. We do not recommend bond funds, and buying individual bonds as a single investor can be very difficult. It is a considerable amount of work to research bonds and find one that fits your criteria.
We believe the reason investors come to active managers is because of the investment philosophy. They take the emotion out of investing with strict investment principles, such as, buy and sell criteria for investments. Investors seek financial advisers to help avoid making emotional mistakes with their money. The tendency is to buy when the market is going up and sell when it is losing money—which is the exact opposite of what an investment manager will do.
In normal markets, index funds can be tax-efficient. However, if you are in an index fund and the market experiences a bear market, it is likely many other investors in the fund will sell out. If the index fund has to sell investments to cover the redemptions, as a long-term investor, you could be hit with capital gains you didn’t plan or want to recognize.
Index funds have their place. They provide diversified exposure to novice investors, and sometimes are the best option inside 401(k) plans. However, we believe investing is only part of the overall financial planning process.
At Henssler Financial we believe you should Live Ready, and that includes consulting experts for financial matters you do not understand. If you have questions regarding your financial situation the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
