What is index investing? Advantages and disadvantages.
Let’s see, is it really that difficult?
There is such a method of investing as investing in indices. For example, there is the Standard and Poors index or S&P500 for short, it contains the results of price movements in the shares of 500 US companies, or, for example, the Dow Jones Industrial Average is an index that tracks movements in the 30 largest US industrial companies. You can also find indexes of IT companies, companies involved in healthcare, the defense industry or the space industry.
As a rule, these indices were created to monitor individual sectors of the economy. Subsequently, exchange-traded investment funds, abbreviated as ETFs, appeared, which invest in the same indices discussed above and many others.
To buy separately the shares of all 500 companies included in the S & P500 index yourself, roughly speaking, to recreate the movement of this index in your portfolio, you will need a considerable amount of several hundred thousand dollars. Which is quite problematic, especially when it comes to you and me, mere mortals, whose income, plus everything, in c.u.h.
And in order to buy 1 share of an ETF that invests in the S & P500 index, $ 150-250 will be enough for you, depending on the index fund. Afterwards, your $150 dollars will continue to move just like the S&P500 index. And on average, it shows a good yield of 6-8% per annum in dollars.
Dow Jones index for the last 20 years
The same can be done if you buy an ETF that invests in the Dow Jones index, or in the banking industry, or in real estate, or in startups. There are countless of them, the main thing is to decide which fund to choose. And Finansgram, in turn, will try to help you with this.
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The benefits of investing in ETFs include:
Having bought a relatively inexpensive asset, you diversify the portfolio at the same moment, because the share of 1 ETF contains movements in many shares, there are those who invest in 100 pieces, someone in 500 like the S&P index, and there are funds that simply invest in index of the world economy, they consist of the shares of all companies on the market. By the way, they show an average growth of 2-4% in dollars.
2 Low entry threshold
You do not need to have large amounts, you can start investing with $100.
3 Starting investor knowledge
You don’t need to be a genius or a super-investor, you don’t need to follow quotes day after day. You need to have a standard set of initial knowledge, how to open a brokerage account, how to make a deal on the stock market, and then you just watch how your capital grows and gradually buy more shares of the index
Of the minuses:
1 Relatively few choices for ordinary investors
There are not so many such ETFs on the Moscow Exchange, they are represented by FinEx, there is an analogue of the S&P500 index, an index investing in shares of China, Germany, Kazakhstan, investing in the US IT sector and several others. If you want to try out index investing, then at least there is something to start with).
2 Small percentage of return on investment and
As you can see, indexes are always growing, which is good if you have enough time ahead, because, for example, you invest in the Dow Jones index, there are 30 companies, one has grown by 95% over the past year, the other has fallen by 60%, the rest are 28 kept within 2.5% per annum, and the final growth on your investments will be (95-60+2.5*28)/30=4% per annum in dollars. It is clear that it is not always possible to see the growth potential, but if you bought only the first 2 companies in equal shares (one grew by 95%, and the second fell 60%), then your income would be 17% per annum. In general, more diversification means less risk and profit. Less diversification means higher risk and higher profit.
PS If you look closely at the charts, you can see that over the past 20 years, even if you entered at the peak of the price before the crisis recession, the value of the index (both Dow Jones and S&P) recovers on average over 7 years. That is, if your investment horizon is more than 7 years, then you will not lose.