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Another Reason to Like Indexing
By JLP | December 8, 2008
I read somewhere over the weekend a letter to the editor of some newspaper (I can’t for the life of me remember where I read the comment) by a guy who was lamenting the fact that investors get screwed no matter who is president. His letter mentioned that some stocks do well when a Republican is in office and other stocks do well when a Democrat is in office—he just didn’t know which ones.
I have a suggestion:
Buy the index and don’t worry about it.
Yes, we can make more money IF we know which stocks are going to outperform the market. The problem is either WE DON’T KNOW or it’s hard to know. Therefore, buying the index is the prudent way to go because you don’t have to worry about picking stocks (unless that’s something you love doing).
Topics: Investing | 5 Comments »
December 8th, 2008 at 3:07 pm
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December 8th, 2008 at 8:50 pm
Well if you pick an index, you have to worry about how the entire market responds the fiscal and monetary policy set by the government instead. It tends to do differently depending on who’s in office as well.
Back to square one.
Indexing basically means that you take 100% of the market risk.
Individual stocks do not necessarily share 100% of the market risk (note that some companies did quite well during this recession). Instead they have business risk.
The only question you have to ask yourself is: Which do you understand better. Markets or companies?
December 8th, 2008 at 9:18 pm
You also need to be good at predicting which candidate will win as the stocks will typically jump the day after the election before you can get a buy order in.
December 8th, 2008 at 10:44 pm
Indexing is great if you’re into that sort of thing.
December 9th, 2008 at 8:52 am
Indexing without rebalancing increases your volatility, and, therefore, your risk. I believe small cap value is supposed to give the best return, so put all your money into that and enjoy the roller coaster ride.