The only thing it seems to add is the opportunity for people to sell you high-margin investment products -- which is exactly what index fund investors are trying to avoid. Any investment product with a marketing budget is taking fees to pay for that, which means they will be unattractive to index investors.
No, it benefits you too. By just holding an index fund you are freeloading on all of their work. You get efficient allocation while doing and paying virtually nothing.
I think people misunderstand how great and powerful index funds are for retail investors. Moreover, I people massively overhype this alternative data thing. Using alternative data to generate alpha is mindbogglingly difficult. If you just buy from a 3rd party firm, most likely all the alpha has been sucked up. So you need to source it yourself, clean it, analyze it, etc etc. It's really fucking difficult, and very expensive.
Trust me, you're not missing out. Your index fund is probably beating the returns of many firms with billions of dollars in capital and dozens of research analysts.
Investment houses don't start from the same place as an index fund. Their returns are penalized from the start due to the fee structure. So not only do they have to beat the market, they have to do it by a sizeable margin before the end user sees a profit advantage.
For a retail investor it is hard to justify not choosing an index fund.
Fund managers: it is even worse. Because customers will choose the fund with the best tack record, managers have an incentive to take high risks when the time to report comes near. If they win, they win big, if they lose, they lose just their bonus.
What i haven't understood yet is why index funds are supposed to be so great. At least if everybody would just buy undex funds, it wouldn't work. Also, who picks the stocks in the index? Why would index funds be better than just buying some random stocks?
An index fund typically performs much better over any meaningful timeframe because it has much lower fees.
But that's not the point here. The big money in investing isn't in beating the market, but charging fees, so fund managers only need to convince people to give them their money, they don't actually have to deliver results, provided they're working within the fund's stated goals.
Investing in an index fund effectively means letting a financial services company such as S&P Global manage your investment without you being their customer. And if you're not paying for it...
Sure, you'll pay a low fixed commission to the fund, but they're just tracking what S&P publishes.
It's not necessarily a bad idea, but it's hardly a panacea with perfect incentives.
They aren't launching an index fund though, so 401K accounts that couldn't hold index options would not benefit in any capacity from this product. This product can only be a reference value and also infrastructure for index options launches.
Then you're not the customer for index funds. They are meant to be highly risk averse, and give decent gains to people who want safety of modest to low gains over high gains high risk.
It's both true and obvious that buying index funds externalizes the cost of researching equities.
However, active investors engage in self-delusion that they can somehow beat the market. Unless they have highly rare insider information, this isn't true, and the top 25% of fund managers are simply that because the bottom 75% is other fund managers.
So it's your trilemma--delude yourself, externalize the cost of research, or watch inflation erode the value of your savings. I'm comfortable with my choice.
Index funds allow amateurs to make money without losing it to "competent" active fund managers. That's all there is to it. You might not understand how many middlemen insert themselves between the amateurs because you're not one of them.
Investing in index is like subscribing for slavery. It only benefits people with tons of money. Sure, it's less risky. But along with preventing massive downside, it prevents massive upside too. I've just got 1 life, limited time and I want to risk everything for a massive upside, not efficient market.
A common theme that keeps popping up in this thread. People pointing out that index funds have downsides, then going silent on what's better. Heck, up thread a ways someone even said they just don't invest. Wait, what? That's the better alternative?
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