Index funds are great because of the simplicity behind them and how dirt cheap (Fee Wise) they are compared to other mutual funds. But please don’t invest all money into index funds.
I will let you in on a little secret why I will always invest part of my money away from index funds. Index funds are considered a passive investing strategy as you can place your money, forget it and realize on average a 4-8% return on your money. Index funds usually mirror the broad based market like the S&P 500, NASDAQ or a plethora of other indices.
The main issue I have is that the returns of Exxon, Apple, IBM, Johnson & Johnson is by far greater in a 20 year time span compared to that of long running Index funds. If you find a calculator that can go back in time and give you what a 10,000 dollar investment over 20 years made in any of the companies I referenced above. You will be amazed to find the amount will be staggering. The returns I’m talking about should be in the hundreds of thousands of dollars. If you compare the same 10 grand into an average index fund investment, it will not even come close.
Now why is the figure so drastically different from the individual big blue chip stocks to an average index fund? I will attempt to be an investing guru, and provide you with the details as to why.
Don’t Invest all Money into Index Funds:
Index Funds do not have Stock Splits; Individual Stocks have Stock Splits on Occasion (2 for 1 is most common)
Individual Stocks usually increase Dividends by a larger % every year
Index Fund Stock Prices do not increase as substantially as Individual Stock Prices per share
Individual Stocks charge a 1 time trading fee, if held in a brokerage account, and you can reinvest shares automatically for free
Index Funds charge you an annual expense fee every year, Individual Stocks don’t unless you buy or trade any shares
Index Funds investors are kept in the dark regarding the increase or decrease of Dividends from year to year
Index Funds Invest in hundreds of Individual stocks themselves to make money, so why shouldn’t you as well
Individual Stocks provide you a dividend payout ratio, and Index Funds do not
Index Funds are a profitable business, and only a small % of profits are shared with owners. (Unless it’s a Vanguard Fund, supposedly all profits are divested back to shareowners)
Further Resources and Examples:
06/16/1987 2 for 1
06/21/2000 2 for 1
02/28/2005 2 for 1
06/09/2014 7 for 1 – Whoa that’s a tremendous Value for Investors
Because of these facts I will continue to invest into Index funds within my 401K and Roth IRA, and with any extra funds I will invest into Individual Stocks. The reason being is if history repeats itself, companies like Chevron, proctor gamble, Microsoft, Target, and Aflac will continue to provide greater appreciation of investment dollars. The compounding of steadily increasing dividends coupled with the increase in share price, and the once in a while stock split will forever outperform index fund returns.
Don’t invest all money into index funds
Rich Uncle EL
I think it's always wise not to invest only in one modality. Almost all of my stock investing is in index funds, but I certainly see your point. My problem is deciding which stock to invest in. It is such a decision that I usually just pick index funds. Now, when it comes to real estate, I am totally involved and will research a particular property or area and make a decision. I guess whatever holds your interest and meets your risk tolerance and future needs is the best place to put part of your money.
I agree that’s why I will continue placing a portion of funds into indexes. I can’t recommend any stocks, but if you go find the dividend champion list, I’m sure you will find many suitable options for long term stock dividend payers. I like at least ten years of successful stock growth.
You make many great points regarding in index funds. It's for the reasons you list above that I prefer individual stocks instead of funds. I think many who like to invest in index funds are ones who truly want to take a set it and forget it approach and figure they will experience less volatility by owning a whole market instead of just individual names. In essence what we are all doing is creating our own little funds by buying into a basket of 20 – 50 dividend paying stocks. Same thing really just different approach.
My recent post Keep Your Goals And Resolutions
Yes very true our own little mutual fund, plus why give the index funds all our money, when they will immediately invest it in individual stocks. Play their game I say and realize real growth of wealth.
I think about it the same way. My plan is to complement my index fund with Dividend growth stocks.
Next to that, I have other portfolios already in place
Main reasons to do so:
Diversification on investment styles
keeping some part of my portfolio under "active" personal management as it is something I like to do.
As long as you have a strategy that works for you is important. I like to separate risk from different sources, as it helps me sleep better at night. Good luck with your financial plan.
This post really convinces me on the benefit of buying individual stocks. Individual stocks have better chance to outperform index fund. But over the long run, will the benefit be averaged out? Like some of the companies you bought went bankrupt and some outperformed the index. So in the end, the result is still average?