My problem with index funds

Discussion in 'ETFs' started by Zestilio, Feb 3, 2016.

  1. Zestilio

    Zestilio

    I think index funds are great for the general investor. However it is terrifying when I read through comments on any website and see people call them "low risk" or "safe".

    I think a lot of people who invest in indexes don't actually know what they're investing in and won't be able to handle the volatility or losses when they come. This is nothing revelatory but it seems to have gotten worse in the last couple years.

    What do you think?
     
  2. rmorse

    rmorse Sponsor

    You have to think of the mind set of an investor, not a trader. Someone that wants to save for retirement, college for their young child etc. For these investors, a mutual fund or ETF that replicates the S&P 100 or 500 is much safer than stock picking where there are daily surprises that can cause large losses. These investors also have full time jobs that make it difficult to focus on stock picking and timing. As I said in other posts, for them, I feel dollar cost averaging is the best way to force savings and grow your assets over the long term.

    When do I feel it's not "safe". When you need the money in the short term.
     
    sowterdad and Chubbly like this.
  3. Visaria

    Visaria

    Index funds or etfs are great vehicles for ACTIVE trading, speculating or investing. However, they are mainly used passively which is of course pure gambling and hoping.
     
  4. The deep risk (permanent loss of capital) in a whole market index fund is generally low compared to buying individual stocks, while the shallow risk is still high.
     
  5. rmorse

    rmorse Sponsor

    What is "shallow risk"?
     
  6. Agree, up to a point.

    When first starting to invest, DCA can have a short-term benefit especially in a declining market (began investing this way myself). It can also have a long term benefit as "savings accumulator". But in the long term DCA morphs into "buy and hold".

    As there is great benefit in doing so, investors need to learn how to avoid the damage of bear markets* at least some of the time.

    *I'm a retired CFP who used to have a "for fee" practice. Also, a former RIA running a mutual fund timing service. I know of what I speak.
     
  7. I define shallow risk as a potential loss that you can recover from
     
  8. rmorse

    rmorse Sponsor

    Got it..thx
     
  9. Agreed, there is "business risk" with individual stock picking which is reduced by holding an ETF or mutual fund basket of stocks.
     
  10. Amalgam

    Amalgam

    Agreed. SPX posted 2 50% drawdowns in the last decade. "Low risk" indeed.
     
    #10     Feb 3, 2016