Index funds

[Maurader1]

if the indices are almost guaranteed to rise 10%/yr over long periods of time, what stops people from putting all their money there and earn at least 10%?

[MrBlue]

I'm a newbie investor as well and the below are my thoughts.


1. Past performance does not necessarily gaurantee future performance.

The US has had incredible growth the last 100 years. If you are bullish on the US economy for the next 30-50 years, then by all means, invest all your money here.

There's also the emerging markets factor.
China, India, Brazil, etc.

And the baby boomer factor.
Are they going to suck the life of the markets starting in 08?

2. How long is long?

There were periods of 5-10 years where performace of the S&P was below 10% per annum. Could you wait it out if we hit one of those streches again?

[midas]

Stock brokers and other financial advisors

It's not a guaranteed 10%. You may gain or lose 30% in a single year. You may lose money over a 10 year period. Therefore those nearing retirement should not have all their money or even more than half in stock index funds. If you're under 30, you don't need the money until retirement, and you won't panic and sell if it drops right away, then by all means stick a whole bunch into an index fund.

[LearnedfromTV]

There are a lot of reasons to think U.S. equities will return significantly less than 10% per year over the next 50 years. This doesn't mean index funds are a bad thing, just that there's no easy path to wealth.

You are much more likely to actually end up with a lot of money in fifty years if you make more realistic assumptions.

[Sniper]

[ QUOTE ]
if the indices are almost guaranteed to rise 10%/yr over long periods of time

[/ QUOTE ]

Not all indexes are the same... they each represent different groupings of stocks... and thus have their own long term past performance figures.

Nothing is guaranteed (like AA in the hole)... You make informed decisions based on the relative risk/reward.

[ QUOTE ]
what stops people from putting all their money there and earn at least 10%?

[/ QUOTE ]

Some of the most widely held funds are SP500 index funds, so alot of people ARE putting their money there.

[Toonces]

Beyond the fact that indices (and for the current discussion, I will assume we are referring to the Vanguard Total Stock Market) are not guaranteed to rise at 10%/year, investing most all of your money in indeces goes against a lot of natural instincts.

First, most people think that they are smarter or better than other investors. By investing in indices, you essentially are admitting that you (or your broker or your advisor or your tip guy) knows no more about what these stocks will do than anyone else.

Second, if people accepted that index funds was the smartest way to invest, it would put stockbrokers and the entire stock-picking industry out of business. Therefore, the industry has an incentive to reject index funds.

Third, people are not good at extrapolating the effects of a 1-2% reduction in costs and what it does over a multi-year period. Tey just assume the the picker's expertise can clearly overcome an additional 1-5% in fees.

[Maurader1]

well, so from what you're saying, I *should* invest in the indexx fund...most people *don't* for the same reason they won't lay down a big hand even though they know they're behind?

okay, given not a 10%/yr, but in say 20 yrs, is it not almost risk free? Granted, I'm young and I should be looking at more aggressive strategies, but for argument's sake, what are the reasons against investing in something like S&P500?

[Sniper]

If you don't want to take the time to educate yourself to make better investment decisions, then you should put $$$ into a SP500 fund, and add to it every month.

nothing in stocks is risk free.

[Maurader1]

Actually I do hope to learn about the market....I just chose this as the starting point...Perhaps I should retitle the post to the to the heart of the matter...Right now, the big con that I see is the low rate of return, and the pro is the low risk factor for long term investment...

Also SP500 is a large cap index, if you want more diversification try some midcaps and/or smallcaps.