Originally Posted by
SonicFlyer
This is the problem with many of them:
"Total market index funds are typically “cap-weighted”. In English, that means that most of your money, when invested, goes into the largest companies based on market capitalization.
So if I buy a mutual fund investing in the entire US stock market I might own over 3,000 stocks, but most of the money I invested goes to buying companies like Apple, Exxon, GE, Chevron, IBM and other massive US firms.
That may sound good to some investors. “Great, I own the most successful US companies. Now I can sleep easily.” Here’s the problem.
Concentrating too much money in ANY one area of the market can lead to less than desirable results over long periods of time. Case in point: From 1966 through 1982, the S&P 500 (another popular cap-weighted index) had an annualized return of 0% per year when inflation is considered. From 2000 through 2012, the index lost .7% per year to inflation. Those are long stretches of time to go without returns, especially if you depend on your investments for income.
What is important to understand is that different areas of the market, which are not well represented by these funds, did quite well during these periods in history. Smaller companies, which only make up a tiny fraction of the holdings of total market funds, can be the real game saver when large stocks go through their periodic seasons of draught. We also need to recognize, as investors, that the biggest and most important companies of today will likely become the “has-beens” of tomorrow due to changes in technology and competition. "
SOURCE:
An Easier Way To Invest? ? Paul Winkler, Inc
1) They have to be cap weighted or the valuations of small companies would be absolutely absurd. There are equal weight index funds available, though most have to close to new investors because once they are too large they can’t put new money to work in small companies without distorting the market. I have no objection to equal weight index funds. If you want more small cap exposure or international exposure there are index funds for those as well, all much cheaper and likely to outperform actively managed mutual funds.
2) Regarding the scenarios of low returns, who invests all their money at once? The use of those points by the source you cited shows either ignorance of how real people invest, or more likely, intentional intellectual dishonesty in an attempt to promote his coaching as being necessary.
Pilots at Delta are investing every two weeks like clockwork, not in one huge lump sum. Picking an absolute peak of the market like 2000 can look scary until you realize you aren’t buying in or selling at any one point, but spread out over decades.