Perhaps not a downside, but something to be aware of — an index fund is, by its nature, a “buy high-sell low” portfolio, given that it’s cap-weighted, so stocks whose market cap is falling must be sold, and those that are rising must be bought, to maintain parity with the index it tracks.
Yes, like all investors collectively, cap-weighted index funds end up with more money in a company if it grows more popular. But that popularity doesn’t necessarily lead an index fund to buy more shares, nor does an index fund necessarily sell shares of companies that have gone out of favor. Rather the change in the fund’s allocation is the result of the rise or fall in the share price of the companies involved.
Klaatu is 100% correct. The problem is that when you look at how index funds have performed overall over the last 20 years and compare it to how non-index funds have performed during that same period, index funds have outperformed 80-90% of their non-index brethren, i.e. index funds almost never hit home runs, but they hit far more triples than non-index funds.
Perhaps not a downside, but something to be aware of — an index fund is, by its nature, a “buy high-sell low” portfolio, given that it’s cap-weighted, so stocks whose market cap is falling must be sold, and those that are rising must be bought, to maintain parity with the index it tracks.
Yes, like all investors collectively, cap-weighted index funds end up with more money in a company if it grows more popular. But that popularity doesn’t necessarily lead an index fund to buy more shares, nor does an index fund necessarily sell shares of companies that have gone out of favor. Rather the change in the fund’s allocation is the result of the rise or fall in the share price of the companies involved.
No home runs.
Klaatu is 100% correct. The problem is that when you look at how index funds have performed overall over the last 20 years and compare it to how non-index funds have performed during that same period, index funds have outperformed 80-90% of their non-index brethren, i.e. index funds almost never hit home runs, but they hit far more triples than non-index funds.
But also no ‘losing everything’.