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Keep It Simple With Index Funds

Uncomplicated, low-cost strategies are a better fit for most investors.

Daniel Sotiroff 13 June, 2018 | 15:27
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The number of complex investment strategies available to investors has never been greater. But most investors are probably still best served by a few simple, market-cap-weighted index funds.

One of the pre-eminent reasons for the popularity of index-tracking funds revolves around the notion of market efficiency--the idea that the market quickly and accurately incorporates all available information about a public company into its stock price. This all-knowing market mechanism makes it difficult to identify stocks that are mispriced, so the logical conclusion is that you should simply own the index and take advantage of the market's long-term aggregate growth. This is a mostly valid argument (there are times when the all-knowing market can be a bit of a know-nothing), and one that I would largely agree with. But the rationale for using a market-cap-weighted index fund goes beyond market efficiency.

The fact that so many varied asset classes and strategies have been democratised might be viewed as a boon for investors. That may be true--to a certain extent. Those who are willing to take the time to perform the necessary due diligence and accept the risks that come with these strategies could benefit. But opening the flood gates also creates an additional burden for many, myself included. We now have to cope with the problem of comprehending these strategies, some of which are far from simple. In some respects, it has never been more difficult to be an investor.

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About Author

Daniel Sotiroff  Daniel Sotiroff is an Analyst, Passive Strategies Research, for Morningstar.

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