What is Index Investing?

A closer look at “just invest in the index” as a long-term investment strategy.

By Louise Googins

Index investing is sometimes referred to as passive investing.

There is not one index. Pick an area of the economy or world geography, and you can find an index…or many indexes. Indexes are groups of stocks bundled together by research showing the average of what is happening in an area of the economy. Index investing is called passive investing.

Although not direct, advertising exists in the articles and statements in multi-media advising you to “just invest in the index.” They proceed to tell you that active managers do not “beat the indexes.” None of those statements are true - except when you cherry pick sections of time and fund managers. The articles use information prepared and distributed by the promoters of index funds; they are advertising, sometimes factual, and largely emotionally leading.

For every individual, investing is a contest to become financially independent. But you do not have to be ”first” or “the winner” to win. There is no limit to the number of potential winners. Everyone who sets up a plan and follows it can become financially independent. Perhaps you can guide yourself, but most people need a qualified person to help them, just as they employ a doctor, dentist, attorney or accountant.

The goal is to earn high returns while battling the emotions of investing. One also needs to apply basic tax and legal knowledge, but the intent of the indexes is to imitate the markets…period.  No one to help you stay the course when the market goes into a swoon or explain tax and legal essentials. And, although index funds are marketed as “low cost,” they still have a cost that the imitated index does not have. Therefore, index investing over the long term ensures that your return will be lower than the index it imitates. Fortunately, there are successful active managers who have outperformed indexes over many decades. An outperformance over 20, 30, 40 years – especially over full market cycles – can make a significant difference.

Successful investing means planning and implementing. “Just invest in the index” is not a plan.  If you want to become financially independent, look for more.

Are you using index investing as a long-term strategy? Schedule an appointment with one of our financial advisors today to learn whether you may benefit from a different approach.

 

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