The market calls of index investing


Courtney’s client isn’t nearly as diversified as one might imagine.

By having money spread out in different funds tracking the Russell 1000 index, “it makes it seem like you’re diversified,” said Courtney. “But they’re all behaving the same way.”

Anything that creates trouble for large firms will impact the client’s entire portfolio. That’s fine in times when U.S. funds are rising, like in our current eight-year bull run. When a market correction comes, though, there’s no protection in place.

Also, by betting solely on U.S. firms, the client gains exposure to 53 percent of the global market capitalization created by American companies while ignoring the 47 percent provided by firms headquartered around the world.

More from Active/Passive:
The top 3 benefits of early market investing
All-index portfolios battle stress, cut costs
Some closed funds ready to reopen for business

It’s very common for clients to come to advisor Robert Gerstemeier’s office saying they want to avoid international companies due to this local bias. Gerstemeier, a CFP and founder of Gerstemeier Financial Group, likens this strategy to a baseball team that has nine players on defense, all standing in right field.

It’s true that U.S. firms have outperformed. Vanguard’s Total International Stock Index has seen 1.8 percent annual returns over the past 10 years compared to 7.4 percent for the S&P 500 index fund Vanguard offers. But even having some exposure to international funds provides protection in case the U.S. economy takes a hit. “It may not be the best left fielder, but it is going to stay in left field,” said Gerstemeier. One large-cap U.S. index fund can’t provide that diversification.

Source link

Products You May Like

Articles You May Like

Roku CEO Anthony Wood has sold $270 million of stock this year so far
Elizabeth Holmes denies destroying evidence in Theranos case
4 time-tested tips for explaining money to children
How to give to a charity crowdfunding drive without getting scammed
Best islands in the Philippines? What to see and do in Batanes

Leave a Reply

Your email address will not be published. Required fields are marked *