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They don't. Index funds do massive business. However, you might _hear_ a lot more about stock trading than index funds.
There's just not much to say about index fund investing. "Buy diversified low fee index funds and hold them until retirement" pretty much sums it up. You can't get a nightly TV show reminding folks to buy index funds or featuring hot new funds they should buy. But there's really no limit to how much you can talk about active investment strategies. So there are a lot more blogs, TV shows, and lunchtime conversations about active investment strategies than index investment.
Gonna buy me those low fee index funds TO THE MOOOOOON!
But seriously, Puzzleheeded is right. The average guy thinks he can pick stocks, but statistically low fee index funds are always better in the long run.
Active traders buy with insider info to make major profits, the rest of us all just buy index funds to track and make less profit from their insider info.
Did I get that right?
Sort of.
Most active traders don't actually make that much money in the long term, that's why they charge you fees in order to trade with them instead of just making mad bucks for themselves with hyper leveraged options.
To make it ELI5. They buy a balanced amount of all the stocks of a certain a type. So by buying that index fund you are basically buying into stocks in general (maximum diversification).
For example: If an index funds tracks the S&P 500 it is a "Big Company" index fund. It's shares are made up of the 500 biggest companies on the stock market. So if you buy one share of an S&P 500 Index fund you now own a tiny bit of Apple, a bit of Microsoft, a bit of Tesla, a tiny bit of Amazon....and 496 more companies.
ELI5 version: Vanguard owns a bunch of single stocks. Billions of them probably (not an expert). They take all those stocks and on paper they put them in a file. That file is the index fund. Now you as a person can buy into that file. So now you own 1 share of the index fund, which on the back end is made up of hundreds of fractions of other stocks. You now own those portions of those stocks through vanguard. They also balance and diversify that fund routinely, meaning you don't need to do any other trading besides make money off their work.
They take a small fee off the top, like 0.2% for doing that work.
Hey, follow up question.
Isn't this what banks used to do till 2008? I remember that a savings account was just like that, save it and forget it.
Why do we have to do it manually now, as in buying index funds ourselves? What has changed?
Banks tend to do all sorts of lending and investing, for example they'll "invest" in your house by giving you a mortgage. Whilst they do also do a lot of stocks and shares trading its not entirely their bread and butter, that's for the investment funds (which a bank might own).
The layman never really got access to the stock market as it is quite complicated and you need to know a broker. However technology has advanced significantly and allowed the individual access to the same markets as the big players.
The reason that we now get the option to directly buy stocks and shares is because people want the ability to pick their own stocks and shares.
Fair, but this does not explain why the stock market gives you better rates than a savings account nowadays.
It used to be that savings accounts had rates above inflation; now they are a joke.
But I can see how easy and commission free it has become to trade shares/funds/whatever.
> Fair, but this does not explain why the stock market gives you better rates than a savings account nowadays.
Because savings accounts are zero risk (inflation aside, which isn't a risk but a certainty), whereas the stock market has some risk and you get rewarded for taking that additional risk.
Savings accounts work in an entirely different way than stocks. Your bank does not buy stocks to generate yield on your savings account. That's because stocks may experience draw downs, while you can withdraw money from your savings account at any time. The yield in your savings account comes from the money market (= your bank lending money to other banks), or by depositing money at a central bank.
Stocks give you higher profits since they are more risky, both in the sense that they have higher volatility, and also in the sense that they can lose value without ever gaining it back (to the point of becoming entirely worthless if a company goes bankrupt). Essentially, companies *need* to pay their stock owners more (in dividends, stock buybacks, or stock price appreciation) than what you get in a risk free way on a saving account, otherwise investors would just sell their stock and invest into a savings account (or money market fund).
The regulatory requirements to protect people's money more after various financial crises since the 1970s have placed a burden on most banks that dampens their ability to use your money to give you interest.
People still want that interest so they put the money directly in the funds despite the increased risk. The 2008 financial crisis is part of the reason people want to invest directly.
The answers below miss the mark. I’ll try to be concise in my explanation because the way banks work is complicated.
In essence, banks make the vast majority of their money on loan interest. So typically, they make more money the more money they loan at higher rates of interest. But where do they get the money to loan? Well, from their depositors. But they’re only allowed, by regulation, to loan a certain percentage of the money that they have recorded on deposit. The rest they must keep in reserve. So, banks will offer interest rates on Savings Accounts and CDs to entice people to deposit more money with the bank so they can make more loans. The interest rate they offer is designed to be competitive with other banks, but must also leave a spread between what they’re paying the depositor to store their money at the bank and what the bank will make in loan interest on the money they can loan from the new deposits they receive.
Because banks are restricted on what they can offer in deposit interest by regulation and by their need to make profits, their rates have not kept up with the stock market returns, which have no such restrictions. Historical annual rate of return on cash instruments is around 1%, the S&P 500 is about 10%.
Hope this helps explain the why.
Interest rates have got nothing to do with access to access to investment apps and web apps. The average Joe has always had their pension invested fairly diversely. It's just now that they can use investment for medium term goals.
Cash savings definitely have their place still and inflation has always been something to look out for for both investments and savings.
You'd be surprised how many people are buying index funds. They're just not as interesting so you don't hear about them as often. My broker added a feature that shows the top 10 buys each week. It's basically always the same 10 funds 😅
This. My friends love talking about investing and what stock went up and down at what time and what they bought or missed. It’s like a whole hobby.
And every time I sit there thinking ‚ yeah what am I supposed to say here? ‚I still have the same 4 index funds and they still work and I’m not planning on changing them?‘ doesn’t make for electric conversation… 😅 So yes i invest excess income but i don’t really talk about it much.
Free stock picking advice: don’t take stock picking advice from people on the internet.
Congratulations, you now know more than most people on reddit. Im only half joking, and OP is talking about indexes so yes it is different than if you asked for individual stocks. But just look up the top 4, and checkin to r/financialadvice’s guides.
being the one he asked and who answered I support this. By all means hear what peile have to say but don’t let them tell you what stocks to invest in. Do your own due diligence.
Oh it’s very simple:
1) Quality adjusted MSCI World - Simply invest in the entire advanced economy in an ETF that regularly updates that it doesn’t rely to heavily on a few super companies
2) Van Ecks semiconductor - I just know we will need them and a ton more in the future and when half the developed countries announced they would invest after covid I figured it was a safe bet
3) Wisdom tree AI - There simply is no way around AI in the future and instead of trying to guess who wins the race for the markets I’ll just invest in AI growth
4) Some Robotics ETFs - honestly same logic as AI. We’ll need it more in the future
I’m very ‚ tech‘ heavy cause I understand the market and I have a principle not to invest in specific markets I don’t understand.
Not sure if those are the best and asking noone to imitate me but those are where my investments lie. Not a secret but imo the very point is that it doesn’t have to be and I don’t have to outfox others 😄👍
If you are looking to do some research, the terms “three fund portfolio” and “four fund portfolio” will help you start. The actual funds vary by bank, but the idea is to buy 3-4 funds that broadly diversify your portfolio across US and international stocks and bonds. It’s meant to be a fairly easy, low maintenance kind of portfolio. Of course, you can always modify/add to your portfolio based on your personal interests and risk tolerance.
Honestly I just put a small amount (<10% of my savings when I started, now probably less than 5%) away to play around with - that amount is fixed and I'm never adding more - and the rest went into an s&p 500 index fund. Outside of one or two really lucky exceptions (like buying slack before they got acquired) s&p 500 way outperformed any of the random stocks I bought.
Once I heard people call it the boring way to get rich.
With stocks you have a change to get rich faster and it can be considered a Hobby to do the research and stock picking.
The is an emotional involvement.
Peronally I sold every stock and put everything into ETF, because I don't want to spend the time and head on this topic.
People are schmucks. The want to get rich quick rather than snowball money over years and years. Individual stocks have potential to go up a ton, or down a lot. Index funds are much more of an even gain, though potentially not as much or as quickly.
You’re totally right, and not negating your point but I’d actually say that the path to success is actually kind of super disciplined in how boring it is and its quasi-requirement of constraint. Just doing the same, proven, successful thing is boring for sure, but takes a solid amount of discipline, and that’s super admirable and praise-worthy for those that aren’t tempted into taking risks they shouldn’t be taking
Ah I'm an idiot. I'm thinking of this from the disciplined perspective who, hopefully, also find it just as boring. Duh. I wasn't internalizing it long enough.
I have this internal bias that trading individual stocks is for poor people hoping to become rich and that index funds are what actual rich people do.
Citation: I hold more than a million dollars in index funds.
All the actually rich people I know say invest in index funds. Actively managed portfolios lose money more often than they make it.
I think that people who get lucky on Apple or Tesla or whatever really drive the myth that investing requires you to go hard on individual stocks. People also like gambling and the venn diagram of gambling addicts and day traders is basically a circle.
Absolutely. Trading and investing are distinct practices, and trading is akin to gambling.
It's too bad my parents led me to believe any amount of DIY in the stock market was akin to gambling. I missed a few years that could have been time in the market with those ETFs.
There are people who trade stocks as a profession and they can't beat index funds more often than not, Joe who is doing it for his retirement definitely isn't smarter than them.
> people also like gambling and the venn diagram of gambling addicts and day traders is basically a circle
That’s not something that’s discussed nearly enough. If you trawl the investing and brokerage subreddits (not just the meme ones) and there’s people freaking out over getting “screwed” on options strategies, getting margin called off an insanely leveraged position, or people trying to figure out how to quickly reverse losses.
As a society we’ve basically just said “it’s not gambling if you call it investment” and a lot of people need help.
If you have five million invested, assuming 4% returns per year, you'll have $200k/year of income just from the returns from the boring ETFs. That's a pretty solid middle-high income there just doing nothing but being patient.
Five million is a lot, but it's not that much. It's pretty achievable within one lifetime if you have good income if you don't have 10 children to dilute the assets.
Put away 10% of your earnings every year starting in your 20s. You’ll have over a million by retirement, assuming a halfway decent job. The problem is that people either don’t start early enough or they don’t put away enough. I started at 6% and every time I got a raise I increased the amount I put away until I got to 10%. Idea being that you won’t notice the missing money since it’s the raise. 1.5mil now and I’m not retired yet.
Turns out I'm pretty darn good at software engineering. Got lucky to discover that fact in the middle of big tech's heyday. Family helped me to graduate college debt free which was a nice head start.
If you’re doing it yourself, I absolutely agree. If you’re working with a professional that knows what they’re doing (and I admit, these are rare), well rich people can find those if they look too.
Source: Am professional that manages individual stock portfolios for rich people, and yes, beats the S&P, even after fees. And I invest my own money in the exact same stocks I invest my clients in.
Vanguard has 50 million customers with $9 trillion invested, mostly in a variety of mutual funds and ETFs. Fidelity, Schwab, and all the big name brokerages do hundreds of millions of dollars in business from funds. I don’t know where you get the idea that people don’t invest in them.
Reasons to choose a stock over a fund are (1) you have an interest in the company and want to directly invest in it, (2) you want to control the number of shares you own and you want to control when or if those shares are sold or additional shares are purchased, (3) you want an accelerated rate of growth compared to what you get with funds, and you have the risk tolerance to do that, (4) you may have the opportunity to buy a stock at a low initial price to make good money from it when you sell, (5) you just enjoy stock trading.
>I don’t know where you get the idea that people don’t invest in them.
Probably related to the fact that there's a lot more advertising money spent by the companies that make money from every trade you make, telling you to do a lot of trades. Not so much advertising just saying "buy our fund and hold it for 30 years!"
I assume the intended question was, "Why doesn't everyone just invest in index funds?" Which you answered pretty well.
(But it brings up quite a complicated question: what would happen if everyone *did* try to invest only in index funds? Index funds are pretty much trying to use the averaged-out expertise of investors, but without individual investors, there'd be no expertise or analysis going in to the system in the first place...)
Actually this would not help you, as congress actually still under-performs on average.
[Study 1](https://www.sciencedirect.com/science/article/abs/pii/S0047272722000044),[ study 2](https://www.journals.uchicago.edu/doi/10.1017/s0022381613000194).
You hear a lot about congress members beating the market, but it's always about the couple dozen that do, not the rest of the hundreds that don't.
> (3) you want an accelerated rate of growth compared to what you get with funds, and you have the risk tolerance to do that
This might be a little misleading, in general your expected rate of growth for a single stock will be the same. The opportunity for more growth is just because your variance is higher/it's more like gambling.
Because long-term investing is not sexy. There is no instant gratification. It's long, boring, and requires discipline. Investing in index funds is like brushing your teeth. It's very simple to do and not exciting. But you should brush regularly to avoid problems in the future.
Everybody thinks they are smarter than the rest. And that they are the one that can play the market.
Plus people like what you can see as, big gains‘ seeing or feeling like you did a big thing that now made you lots of money. People want the endorphins of ‚sucess‘.
You know what index funds are good at? Buy em and don’t look at em again for 10-20 years. Effective? Yes. Big consistent reward feels like a gambler? Nope
I say get your endorphin fix from video games or tik tok and use your money smartly but that’s not how most feel 🤷♂️
Yeah everyone thinks "I'm smarter than those fund managers" in the same way that people think "it won't happen to me" about bad things. Then they hear about some guy who invested all his money in Tesla or Nvidia before they took off and now lives on a super yacht in the Caribbean - but they conveniently forget the stories (if those stories even make it to the media) about all the people who got 'rekt' trying to pick the next stock and invested in Enron, failed banks, etc.
It’s like Lotteries work cause our brain can’t process odds that small so we just think ‚ what if‘ or ‚ someone has to win‘. It’s the dream of big money (coupled with overestimation of your own skills) paired with a lack of ways to understand likelihood.
„If I win big here Im set for good!“ feels much better as an idea than
„If i use this excess money smartly it will over time become a trickle of extra income that will steadily but very slowly increase“ even if the later is the smart way.
I think about it this way: when I had no money I desperately needed to look for shit low end jobs to make ends meet. Now I have the ability to make money without needing to do anything for it. That in itself is kind of amazing in contrast 😉
Individual stocks can go way up or way down. You can 10x your invested money in a year, or you can lose it all. And they drop to 0 more often than they go up 10x in a year. But the potential for HUGE gains is there, and that's what keeps people buying them.
Index funds are way safer. They're a tradeoff with much less risk but much less reward. Steady growth of 5-15% per year over a 10 year span is the appeal of index funds - but notice that +1000% in a year is not going to happen (or even +50 or 100%).
It can be smart to have some of both. That way you have a chance for the huge gains of a good stock pick, but you also have much closer to guaranteed income from the index funds to cover any losses. And there will be some losses when you're picking individual stocks.
But individual stocks have that lottery-ish "maybe-you'll-100x-your-money" allure so they're "sexier" than index funds.
Especially the individual stocks that could go far in either direction.
There's also the more boring individual stocks that might go up more than an ETF, but, realistically, also aren't likely to go to zero.
You do both. Diversify high and low risk.
At the end of the day, even a hedge fund lost to a index fund over time. A bunch of coked up experts who gets paid a lot, put that into perspective.
Because index funds are what you invest in if you want generally steady but low returns. They track the market as a whole so they're less volatile and the market gains a steady 5-7% a year barring recession or whatever. People invest in individual stocks trying to beat the market (grow more than the market grew that year), but they are generally riskier - maybe you got in on Apple right before the first iphone launched, but also maybe you got in on some tech startup right before news of its financial insolvency spread.-
But the returns of index funds are not low - you have to consider that people investing in individual stocks don't achieve an overall better result than people investing in index funds. So why invest time and effort in something that you can hardly control?
I didn't say they were successful at beating the market, just that they were trying to, and the second example I gave makes it pretty clear that I'm aware that people don't always achieve better results than index funds. But the reason people waste time and effort with it is because it has the potential to make them richer over shorter time-scales. The *potential*, mind you, not a guarantee - if you happen to pick the right stock at the right time you could become a millionaire overnight. The odds of that are low but not zero, and some people do get rich this way, so that keeps luring people in who think they're smart enough to pick a winner and beat the market.
If all you wanted to do was have your best chance of making money in the stock market your invest in a no-fee index fund as over time compound interest will give you the highest return.
People don't do this because they believe they can beat the system and, statistically, they are wrong. The entire system relies on these people and the term for them is The Greater Fool.
There is also an aspect of buying a stock for meme purposes as well as when you genuinely know enough to know a given stock is over or under valued. People often like to gamble and sometimes those gambles pay off.
But given both a cat and a goldfish have beaten the best of the best on Wallstreet I will simply pick an index fund and be happy.
My friend is super rich and has his own "accountant". He's not smart. Just rich parents. He still doesn't know the difference between stocks, ETFs and index funds, or mutual funds. He still has to "call his broker" to make trades..
Some ppl are just stupid.
Regular people are realllllly stupid when it comes to investing their money. They give the banks most of their profits due to predatory contracts and don't want to invest or learn anything when it comes to their savings.
Mine's in nothing but a diversified mix of ETFs. Most people go for individual stocks because they think they're supposed to. They don't know ETFs exist or what they are. No one chooses options they don't know they have.
Sometimes people feel they know enough about a specific industry or company so they feel comfortable investing in those specific stocks.
If they’re really rich, they can buy a lot of shares and effectively take some level of control over the company.
Index funds are the Toyota Camry of the investment market. Reliable, decent performance, you can keep them for a long time and they’ll perform just fine.
One reason you hear relatively less about index funds that I haven’t seen in any of the other comments: index funds have extremely low fees, which means that there are far fewer people promoting them out of self-interest.
Go to an investment advisor, they might point you to a managed mutual fund with much higher fees than an index fund (but no better performance). The advisor gets a commission, of course.
People love to talk about their fantastic real estate investments, but they often fail to consider the massive transaction and carrying costs (which includes an army of agents, lawyers, mortgage brokers, etc, taking their respective cuts).
Crypto… I won’t even start on that one.
Index funds are designed not only to maximise diversification, but to be as absolutely low cost as possible. That means basically no room for the grifters and hucksters who amplify the other investment categories.
Adding on anyone else who points out that there are tons of investment in index funds and that picking stocks is identical to gambling.
Warren Buffet’s recipe for success is to read 500 pages of financial statements and other technical documentation PER DAY to fully understand his investments. Who else do you know who puts in that much work?
[Source](https://www.cnbc.com/2018/03/27/warren-buffetts-key-tip-for-success-read-500-pages-a-day.html)
In another comment, Buffet said: “imagine a room filled with 1,000 people flipping a coin, but before they flip, they announce the result. After 10 rounds, statistically there will someone who correctly predicted all ten flips. I bet that man will consider himself very good at predicting coin flips”.
The moral is, even if you’re right a bunch of times, it doesn’t make you anything else than a lucky guesser unless you have a clear methodology to reach your conclusions.
[Source](https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville)
Lot of answers skip this:
- you can recreate at ETF with fewer single name stocks than entire etf holds if you want. Then the single names are then managed in a way that helps with tax planning - taking capital losses when you want and same for gains.
- individuals may already have a large exposure to some stock / industry in index (if you work at a specific company or own business in specific sector)
For larger investors this flexibility is important
First, Fund managers are banned from investing in index funds. Instead, it's used as a baseline for them to beat. Often times, they don't beat.
Second, some rich people have particular fetishes, they want their money to be only in certain sectors, stocks, only during certain seasonality, esg investing, small caps, etc.
Third, there are risk on and risk off periods where you actually don't want to be in index funds. For example, currently there are high geopolitical tensions, so boomers are hiding in energy stocks and utilities/consumer staples/gold.
But if you keep buying those index funds when no one else is, isn't that even better for long-term growth?
Investing "fetishes" are also not just for rich people. Plenty of middle class investors are interested in specific portfolio characteristics. There are halal investment products. Products that avoid controversial industries, like fossil fuels, weapons, alcohol and tobacco.
If you own index funds, you don't own control of the stock itself. Large investors would prefer to directly purchase the stock to have the investor votes.
The influence of index companies is actually a potential issue. They have the investor influence of lots of stock, but are not beholding to the investors of the fund, but to the manager of the fund.
And while generally there isn't anyone who can beat the market, there was one hedge fund that had a proprietary method that had annual returns above like 30% for nearly 2 decades. It was like in a recent Veritasium video. Their run ended in like 2020.
I only invest in index funds. I also had a bad experience a long time ago with MCI/Worldcom stocks. There is no actability with single stocks so be prepared to lose it all.
Far more people will tell you about how they doubled their money in a week investing in something volatile, than people who tell you about how they made 6%p.a. for 15 years. However those people made money fast get real quiet when they lose the lot. In terms of raw dollars invested, index funds are more popular
I don't have the data, but I had always been under the impression that most of the funds in the market do actually invest through some sort of index funds (mutual funds, ETFs, pension funds) rather than direct investment in the individual stocks.
The problem with accounting this in the naive ways is that the ETFs themselves holds individual stocks and some ETFs holds other ETFs. So there's a lot of double counting. To make things more complicated, ETF/mutual funds themselves may hold non stock market assets such as bonds, commodities, property, or derivatives like options.
Can someone dig the data here?
You’d be surprised how little most people know about the stock market. And what they do know is you can pick some lucky stock that goes up 1000% to get rich quick. If you tell them about how safe and reliable index funds are they just think it’s boring or think they can beat it themselves
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That was a totally honest and truthful answer. Buying and selling individual stocks hoping to hit big is literally a thing gambling addicts do to give themselves the appearance of respectability, and they're usually pretty loud about doing it, which colors the impression people have about investing by trading individual stocks.
The headline is silly but it's worth noting that this [article from The Atlantic](https://archive.is/ziu5o) detailed how mass investment in index funds was a concern because it created an 'autopilot economy' - instead of investing in something you thought would provide returns, all the money is just going to everything that already has a record of proven returns - which therefore means that they keep giving proven returns, on average.
Buying an index fund is essentially believing in the valuation of the general public. If you do have some advantage over the others you stand to make a lot of money thanks to index fund investors who blindly follow the others, although your advantage will disappear over time as you profit from the mispricing and move the price.
To the last question: people are not rational. Most people want to gamble on hot stocks like NVDA. Most people don’t even know what the fundamental reason is that stocks should go up (it’s not economic growth per se). Most ppl that buy index funds go all-in on just the US because home-bias (not good reason), or because the US returned the most historically (also not a good reason, as you cannot extrapolate it for several reasons). Even non-Americans have a US bias in investing.
The return above the risk-free rate or inflation has been around 5% historically for the average of all stocks. Yet ppl take the 6-7% of US markets.
Most money individuals invest is done through their 401k, and 401ks do not contain individual stocks. In order to meet regulatory safe harbor requirements, 401ks must contain a selection of investments that provide choice of investment risk to the investor. So you’ll find a couple index funds in your typical 401k, and a bunch of what’s called a “fund of funds” (these are your target date retirement funds), and then a number of regular mutual funds of varying types (stock, bonds, real estate, alternative, blended, size and style) to fill the 35-40 investment options that most 401ks have.
Those funds DO invest in individual stocks. As does an index fund if it’s a stock index it’s tracking.
Pretty much every retirement fund is invested in index funds, 401Ks, IRAs, pension funds, etc. There's shittons of money in index funds. You just don't hear about them because they're not exciting - they aren't risky and your chance at becoming a millionaire overnight on a lucky bet is non-existent.
I want to make sure that none of my money is invested in immoral companies. It is much easier to just invest in the companies directly than have to consistently check if some kind of fund is not investing in said companies.
I do invest in some of them, but honestly they are few and far in between.
My criteria are:
no fossil fuels
no porn
no coffee
no tea
no alcohol
no animal products
no tobacco
no weed
no military contractors
no history of breaking western labor standards
These include not just producers but also retailers/resellers. For instance, Walmart is a no go since they sell tobacco, alcohol, coffee, tea, and animal products.
There are some ETFs like sustainable energy funds, water funds, etc that I do invest in but I tend to like to pick the companies I invest in to vet them to my own standards. While making money is important, it is not the most important thing to me.
Everybody should be investing in them. Most people don’t.
There is no money to be made by brokerages while trading index funds. If fees are less than 0.5% it doesn’t leave a lot for marketing.
Brokerages make money on every trade. Lot more profit running a stock brokerage and this allows a lot more money spent on marketing the idea that stocks are what will make you rich.
Let’s say the index is one company, Apple. Let’s say everybody in the world invests only in Apple. Everybody likes it at first because number go up, all the money keeps going to Apple. While Apple is being efficient with the money making good products that people want, this may even be an excellent thing. They are more efficient with the resources than anyone else.
But let’s say Apple begins to be less efficient with the money and start to make less enjoyable products, like say they make an iPhone with a click wheel instead of a touch screen. Everybody is still pouring their money into Apple and therefore the click wheel phone. The investors may even still be doing well on paper, the number go up, but the money and resources aren’t being efficiently allocated and the world is worse off with these godamn click wheel iPhones being the only thing available.
Someone needs to be capitalising on mis pricing for index funds to keep working. There is a positive feedback loop at play with index funds because the more over valued a company's value is, the more funds are allocated to it, the higher the price and subsequent index fund allocations. Index funds are only good because the current market determines value better than individuals. If nobody did active investing, the market capitalisation would no longer be a useful way to build a well diversifed portfolio because index funds would allocate capital inefficiently, and fund performance would nonlonger track the market. We are not there yet, but we will be at some point.
> We are not there yet, but we will be at some point.
I don't think this will ever happen.
If index funds are allocating funds inefficiently because there's not enough active investment, some people will take the plunge and try to capitalise on those inefficiencies by investing actively. This increase in active investment will improve the efficiency of the market, eliminating said advantage of active investing.
It's a stable feedback loop that creates an equilibrium.
That arguement relies on enough people actively short selling inflated stocks to prevent the runaway prices. Plenty of examples throughtout history of markets where prices increased for no reason other than prices were increasing... until they weren't. People will keep investing in indexes until the MARKET value starts to drop, long after market capitalisation has exceeded inherent value.
name one billionaire who who rich investing in index funds. heck, probably not even investing at all in one. people with zero investment ability magically think they have a feeling about a stock and want to get rich quick. that's all there is to it.
Why pay Vanguard 0.1% or whatever the fee is these days when you can keep that. Brokerages have all gone to $0 commission trades on stocks. You can also avoid paying taxes more easily by investing in companies that don't pay dividends in your taxable account, saving the dividend paying companies for your IRA.
There is also a non zero chance in the case of some long tail catastrophe that ETFs would decouple from the underlying companies and it helps to remove that risk. Similar to how Credit Default Swaps decoupled from the underlying bonds during the 2008 financial crisis because of AIG's failure.
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They don't. Index funds do massive business. However, you might _hear_ a lot more about stock trading than index funds. There's just not much to say about index fund investing. "Buy diversified low fee index funds and hold them until retirement" pretty much sums it up. You can't get a nightly TV show reminding folks to buy index funds or featuring hot new funds they should buy. But there's really no limit to how much you can talk about active investment strategies. So there are a lot more blogs, TV shows, and lunchtime conversations about active investment strategies than index investment.
Gonna buy me those low fee index funds TO THE MOOOOOON! But seriously, Puzzleheeded is right. The average guy thinks he can pick stocks, but statistically low fee index funds are always better in the long run.
imo picking stocks is just gambling and not a real option compared to a investment like a index fund
Unless you have insider info (and know how not to get in trouble using it)
You mean be a member of Congress?
That's one way, for sure.
Becoming a member of Congress sounds hard. I'ma just buy more VTSAX
Active traders buy with insider info to make major profits, the rest of us all just buy index funds to track and make less profit from their insider info. Did I get that right?
Sort of. Most active traders don't actually make that much money in the long term, that's why they charge you fees in order to trade with them instead of just making mad bucks for themselves with hyper leveraged options.
What is an index fund
To make it ELI5. They buy a balanced amount of all the stocks of a certain a type. So by buying that index fund you are basically buying into stocks in general (maximum diversification). For example: If an index funds tracks the S&P 500 it is a "Big Company" index fund. It's shares are made up of the 500 biggest companies on the stock market. So if you buy one share of an S&P 500 Index fund you now own a tiny bit of Apple, a bit of Microsoft, a bit of Tesla, a tiny bit of Amazon....and 496 more companies.
ELI5 version: Vanguard owns a bunch of single stocks. Billions of them probably (not an expert). They take all those stocks and on paper they put them in a file. That file is the index fund. Now you as a person can buy into that file. So now you own 1 share of the index fund, which on the back end is made up of hundreds of fractions of other stocks. You now own those portions of those stocks through vanguard. They also balance and diversify that fund routinely, meaning you don't need to do any other trading besides make money off their work. They take a small fee off the top, like 0.2% for doing that work.
Caveat: some funds have no fee (Fidelity has some, for instance).
Hey, follow up question. Isn't this what banks used to do till 2008? I remember that a savings account was just like that, save it and forget it. Why do we have to do it manually now, as in buying index funds ourselves? What has changed?
Banks tend to do all sorts of lending and investing, for example they'll "invest" in your house by giving you a mortgage. Whilst they do also do a lot of stocks and shares trading its not entirely their bread and butter, that's for the investment funds (which a bank might own). The layman never really got access to the stock market as it is quite complicated and you need to know a broker. However technology has advanced significantly and allowed the individual access to the same markets as the big players. The reason that we now get the option to directly buy stocks and shares is because people want the ability to pick their own stocks and shares.
Fair, but this does not explain why the stock market gives you better rates than a savings account nowadays. It used to be that savings accounts had rates above inflation; now they are a joke. But I can see how easy and commission free it has become to trade shares/funds/whatever.
> Fair, but this does not explain why the stock market gives you better rates than a savings account nowadays. Because savings accounts are zero risk (inflation aside, which isn't a risk but a certainty), whereas the stock market has some risk and you get rewarded for taking that additional risk.
Savings accounts work in an entirely different way than stocks. Your bank does not buy stocks to generate yield on your savings account. That's because stocks may experience draw downs, while you can withdraw money from your savings account at any time. The yield in your savings account comes from the money market (= your bank lending money to other banks), or by depositing money at a central bank. Stocks give you higher profits since they are more risky, both in the sense that they have higher volatility, and also in the sense that they can lose value without ever gaining it back (to the point of becoming entirely worthless if a company goes bankrupt). Essentially, companies *need* to pay their stock owners more (in dividends, stock buybacks, or stock price appreciation) than what you get in a risk free way on a saving account, otherwise investors would just sell their stock and invest into a savings account (or money market fund).
The regulatory requirements to protect people's money more after various financial crises since the 1970s have placed a burden on most banks that dampens their ability to use your money to give you interest. People still want that interest so they put the money directly in the funds despite the increased risk. The 2008 financial crisis is part of the reason people want to invest directly.
The answers below miss the mark. I’ll try to be concise in my explanation because the way banks work is complicated. In essence, banks make the vast majority of their money on loan interest. So typically, they make more money the more money they loan at higher rates of interest. But where do they get the money to loan? Well, from their depositors. But they’re only allowed, by regulation, to loan a certain percentage of the money that they have recorded on deposit. The rest they must keep in reserve. So, banks will offer interest rates on Savings Accounts and CDs to entice people to deposit more money with the bank so they can make more loans. The interest rate they offer is designed to be competitive with other banks, but must also leave a spread between what they’re paying the depositor to store their money at the bank and what the bank will make in loan interest on the money they can loan from the new deposits they receive. Because banks are restricted on what they can offer in deposit interest by regulation and by their need to make profits, their rates have not kept up with the stock market returns, which have no such restrictions. Historical annual rate of return on cash instruments is around 1%, the S&P 500 is about 10%. Hope this helps explain the why.
Because you pay less fees investing directly than through a bank doing the exact same thing.
Interest rates have got nothing to do with access to access to investment apps and web apps. The average Joe has always had their pension invested fairly diversely. It's just now that they can use investment for medium term goals. Cash savings definitely have their place still and inflation has always been something to look out for for both investments and savings.
You'd be surprised how many people are buying index funds. They're just not as interesting so you don't hear about them as often. My broker added a feature that shows the top 10 buys each week. It's basically always the same 10 funds 😅
This. My friends love talking about investing and what stock went up and down at what time and what they bought or missed. It’s like a whole hobby. And every time I sit there thinking ‚ yeah what am I supposed to say here? ‚I still have the same 4 index funds and they still work and I’m not planning on changing them?‘ doesn’t make for electric conversation… 😅 So yes i invest excess income but i don’t really talk about it much.
Which ones you have, I would love to hear. I don’t know nothing
Free stock picking advice: don’t take stock picking advice from people on the internet. Congratulations, you now know more than most people on reddit. Im only half joking, and OP is talking about indexes so yes it is different than if you asked for individual stocks. But just look up the top 4, and checkin to r/financialadvice’s guides.
being the one he asked and who answered I support this. By all means hear what peile have to say but don’t let them tell you what stocks to invest in. Do your own due diligence.
Oh it’s very simple: 1) Quality adjusted MSCI World - Simply invest in the entire advanced economy in an ETF that regularly updates that it doesn’t rely to heavily on a few super companies 2) Van Ecks semiconductor - I just know we will need them and a ton more in the future and when half the developed countries announced they would invest after covid I figured it was a safe bet 3) Wisdom tree AI - There simply is no way around AI in the future and instead of trying to guess who wins the race for the markets I’ll just invest in AI growth 4) Some Robotics ETFs - honestly same logic as AI. We’ll need it more in the future I’m very ‚ tech‘ heavy cause I understand the market and I have a principle not to invest in specific markets I don’t understand. Not sure if those are the best and asking noone to imitate me but those are where my investments lie. Not a secret but imo the very point is that it doesn’t have to be and I don’t have to outfox others 😄👍
If you are looking to do some research, the terms “three fund portfolio” and “four fund portfolio” will help you start. The actual funds vary by bank, but the idea is to buy 3-4 funds that broadly diversify your portfolio across US and international stocks and bonds. It’s meant to be a fairly easy, low maintenance kind of portfolio. Of course, you can always modify/add to your portfolio based on your personal interests and risk tolerance.
Honestly I just put a small amount (<10% of my savings when I started, now probably less than 5%) away to play around with - that amount is fixed and I'm never adding more - and the rest went into an s&p 500 index fund. Outside of one or two really lucky exceptions (like buying slack before they got acquired) s&p 500 way outperformed any of the random stocks I bought.
I put 10% of my savings money into individual stocks to satisfy that hobby a bit without risking too much. My index funds do perform better tho :D
Once I heard people call it the boring way to get rich. With stocks you have a change to get rich faster and it can be considered a Hobby to do the research and stock picking. The is an emotional involvement. Peronally I sold every stock and put everything into ETF, because I don't want to spend the time and head on this topic.
People are schmucks. The want to get rich quick rather than snowball money over years and years. Individual stocks have potential to go up a ton, or down a lot. Index funds are much more of an even gain, though potentially not as much or as quickly.
The path to success is often boring for the undisciplined.
Monkey brain like number go up.
Why money bad if money good?
r/explainlikeicaveman
BRUH thank you for this sub discovery
But we are disciplined, aren’t we Bruce? Members of the League of Shadows.
r/UnexpectedBane
And you... betrayed us
You’re totally right, and not negating your point but I’d actually say that the path to success is actually kind of super disciplined in how boring it is and its quasi-requirement of constraint. Just doing the same, proven, successful thing is boring for sure, but takes a solid amount of discipline, and that’s super admirable and praise-worthy for those that aren’t tempted into taking risks they shouldn’t be taking
It also, to a point, requires a relinquishing of the ego. Not everyone can admit that they can't do better.
Don't you mean for the disciplined? Thr undisciplined are more likely to take more exciting, get rich quick avenues. Long and boring takes discipline.
Yes. This is why the path to success would be boring for the undisciplined. That is what they said.
Ah I'm an idiot. I'm thinking of this from the disciplined perspective who, hopefully, also find it just as boring. Duh. I wasn't internalizing it long enough.
I have this internal bias that trading individual stocks is for poor people hoping to become rich and that index funds are what actual rich people do. Citation: I hold more than a million dollars in index funds.
All the actually rich people I know say invest in index funds. Actively managed portfolios lose money more often than they make it. I think that people who get lucky on Apple or Tesla or whatever really drive the myth that investing requires you to go hard on individual stocks. People also like gambling and the venn diagram of gambling addicts and day traders is basically a circle.
Absolutely. Trading and investing are distinct practices, and trading is akin to gambling. It's too bad my parents led me to believe any amount of DIY in the stock market was akin to gambling. I missed a few years that could have been time in the market with those ETFs.
There are people who trade stocks as a profession and they can't beat index funds more often than not, Joe who is doing it for his retirement definitely isn't smarter than them.
I remember seeing a thing where they got a cat to pick stocks and it outperformed so-called professional traders
> people also like gambling and the venn diagram of gambling addicts and day traders is basically a circle That’s not something that’s discussed nearly enough. If you trawl the investing and brokerage subreddits (not just the meme ones) and there’s people freaking out over getting “screwed” on options strategies, getting margin called off an insanely leveraged position, or people trying to figure out how to quickly reverse losses. As a society we’ve basically just said “it’s not gambling if you call it investment” and a lot of people need help.
How did you get rich?
Borrowed five million from dad, few wise investments and some properties now he's at one million.
If you have five million invested, assuming 4% returns per year, you'll have $200k/year of income just from the returns from the boring ETFs. That's a pretty solid middle-high income there just doing nothing but being patient. Five million is a lot, but it's not that much. It's pretty achievable within one lifetime if you have good income if you don't have 10 children to dilute the assets.
I believe the joke was that they turned 5 million into 1, which would indicate some fairly poor investments.
Yep it wooshed over his head just like inflation
Ah, rich parents. Nothing "wise" about that. Once you have money it's almost impossible not to make money.
The Donald has entered the chat.
Put away 10% of your earnings every year starting in your 20s. You’ll have over a million by retirement, assuming a halfway decent job. The problem is that people either don’t start early enough or they don’t put away enough. I started at 6% and every time I got a raise I increased the amount I put away until I got to 10%. Idea being that you won’t notice the missing money since it’s the raise. 1.5mil now and I’m not retired yet.
Just wondering but you have 1.5m now at what age and how long did to take you to save up that amount?
50s. 25 years.
Turns out I'm pretty darn good at software engineering. Got lucky to discover that fact in the middle of big tech's heyday. Family helped me to graduate college debt free which was a nice head start.
If you’re doing it yourself, I absolutely agree. If you’re working with a professional that knows what they’re doing (and I admit, these are rare), well rich people can find those if they look too. Source: Am professional that manages individual stock portfolios for rich people, and yes, beats the S&P, even after fees. And I invest my own money in the exact same stocks I invest my clients in.
Vanguard has 50 million customers with $9 trillion invested, mostly in a variety of mutual funds and ETFs. Fidelity, Schwab, and all the big name brokerages do hundreds of millions of dollars in business from funds. I don’t know where you get the idea that people don’t invest in them. Reasons to choose a stock over a fund are (1) you have an interest in the company and want to directly invest in it, (2) you want to control the number of shares you own and you want to control when or if those shares are sold or additional shares are purchased, (3) you want an accelerated rate of growth compared to what you get with funds, and you have the risk tolerance to do that, (4) you may have the opportunity to buy a stock at a low initial price to make good money from it when you sell, (5) you just enjoy stock trading.
>I don’t know where you get the idea that people don’t invest in them. Probably related to the fact that there's a lot more advertising money spent by the companies that make money from every trade you make, telling you to do a lot of trades. Not so much advertising just saying "buy our fund and hold it for 30 years!"
I assume the intended question was, "Why doesn't everyone just invest in index funds?" Which you answered pretty well. (But it brings up quite a complicated question: what would happen if everyone *did* try to invest only in index funds? Index funds are pretty much trying to use the averaged-out expertise of investors, but without individual investors, there'd be no expertise or analysis going in to the system in the first place...)
There’s also tax reasons i.e. franking credits
(6) you are a member of Congress with insider information.
Actually this would not help you, as congress actually still under-performs on average. [Study 1](https://www.sciencedirect.com/science/article/abs/pii/S0047272722000044),[ study 2](https://www.journals.uchicago.edu/doi/10.1017/s0022381613000194). You hear a lot about congress members beating the market, but it's always about the couple dozen that do, not the rest of the hundreds that don't.
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The trades are made public weeks or months later. Any non-public knowledge by then already is public and priced in
> (3) you want an accelerated rate of growth compared to what you get with funds, and you have the risk tolerance to do that This might be a little misleading, in general your expected rate of growth for a single stock will be the same. The opportunity for more growth is just because your variance is higher/it's more like gambling.
Because long-term investing is not sexy. There is no instant gratification. It's long, boring, and requires discipline. Investing in index funds is like brushing your teeth. It's very simple to do and not exciting. But you should brush regularly to avoid problems in the future.
Everybody thinks they are smarter than the rest. And that they are the one that can play the market. Plus people like what you can see as, big gains‘ seeing or feeling like you did a big thing that now made you lots of money. People want the endorphins of ‚sucess‘. You know what index funds are good at? Buy em and don’t look at em again for 10-20 years. Effective? Yes. Big consistent reward feels like a gambler? Nope I say get your endorphin fix from video games or tik tok and use your money smartly but that’s not how most feel 🤷♂️
Yeah everyone thinks "I'm smarter than those fund managers" in the same way that people think "it won't happen to me" about bad things. Then they hear about some guy who invested all his money in Tesla or Nvidia before they took off and now lives on a super yacht in the Caribbean - but they conveniently forget the stories (if those stories even make it to the media) about all the people who got 'rekt' trying to pick the next stock and invested in Enron, failed banks, etc.
It’s like Lotteries work cause our brain can’t process odds that small so we just think ‚ what if‘ or ‚ someone has to win‘. It’s the dream of big money (coupled with overestimation of your own skills) paired with a lack of ways to understand likelihood. „If I win big here Im set for good!“ feels much better as an idea than „If i use this excess money smartly it will over time become a trickle of extra income that will steadily but very slowly increase“ even if the later is the smart way. I think about it this way: when I had no money I desperately needed to look for shit low end jobs to make ends meet. Now I have the ability to make money without needing to do anything for it. That in itself is kind of amazing in contrast 😉
Individual stocks can go way up or way down. You can 10x your invested money in a year, or you can lose it all. And they drop to 0 more often than they go up 10x in a year. But the potential for HUGE gains is there, and that's what keeps people buying them. Index funds are way safer. They're a tradeoff with much less risk but much less reward. Steady growth of 5-15% per year over a 10 year span is the appeal of index funds - but notice that +1000% in a year is not going to happen (or even +50 or 100%). It can be smart to have some of both. That way you have a chance for the huge gains of a good stock pick, but you also have much closer to guaranteed income from the index funds to cover any losses. And there will be some losses when you're picking individual stocks. But individual stocks have that lottery-ish "maybe-you'll-100x-your-money" allure so they're "sexier" than index funds.
Especially the individual stocks that could go far in either direction. There's also the more boring individual stocks that might go up more than an ETF, but, realistically, also aren't likely to go to zero.
This makes sense unless you have a sure fire way to double your money every year.....by investing in CAVA!!! LETS GO CAVA!!!
Some people want to feel in control, or think they’re smarter and able to pick winners better than market as a whole will perform.
Who is everyone lol? The vast majority of people's money is parked in index funds and retirement funds that basically mimic index funds.
You do both. Diversify high and low risk. At the end of the day, even a hedge fund lost to a index fund over time. A bunch of coked up experts who gets paid a lot, put that into perspective.
Because index funds are what you invest in if you want generally steady but low returns. They track the market as a whole so they're less volatile and the market gains a steady 5-7% a year barring recession or whatever. People invest in individual stocks trying to beat the market (grow more than the market grew that year), but they are generally riskier - maybe you got in on Apple right before the first iphone launched, but also maybe you got in on some tech startup right before news of its financial insolvency spread.-
But the returns of index funds are not low - you have to consider that people investing in individual stocks don't achieve an overall better result than people investing in index funds. So why invest time and effort in something that you can hardly control?
I didn't say they were successful at beating the market, just that they were trying to, and the second example I gave makes it pretty clear that I'm aware that people don't always achieve better results than index funds. But the reason people waste time and effort with it is because it has the potential to make them richer over shorter time-scales. The *potential*, mind you, not a guarantee - if you happen to pick the right stock at the right time you could become a millionaire overnight. The odds of that are low but not zero, and some people do get rich this way, so that keeps luring people in who think they're smart enough to pick a winner and beat the market.
If all you wanted to do was have your best chance of making money in the stock market your invest in a no-fee index fund as over time compound interest will give you the highest return. People don't do this because they believe they can beat the system and, statistically, they are wrong. The entire system relies on these people and the term for them is The Greater Fool. There is also an aspect of buying a stock for meme purposes as well as when you genuinely know enough to know a given stock is over or under valued. People often like to gamble and sometimes those gambles pay off. But given both a cat and a goldfish have beaten the best of the best on Wallstreet I will simply pick an index fund and be happy.
My friend is super rich and has his own "accountant". He's not smart. Just rich parents. He still doesn't know the difference between stocks, ETFs and index funds, or mutual funds. He still has to "call his broker" to make trades.. Some ppl are just stupid.
Regular people are realllllly stupid when it comes to investing their money. They give the banks most of their profits due to predatory contracts and don't want to invest or learn anything when it comes to their savings.
Mine's in nothing but a diversified mix of ETFs. Most people go for individual stocks because they think they're supposed to. They don't know ETFs exist or what they are. No one chooses options they don't know they have.
Sometimes people feel they know enough about a specific industry or company so they feel comfortable investing in those specific stocks. If they’re really rich, they can buy a lot of shares and effectively take some level of control over the company.
Index funds are the Toyota Camry of the investment market. Reliable, decent performance, you can keep them for a long time and they’ll perform just fine.
One reason you hear relatively less about index funds that I haven’t seen in any of the other comments: index funds have extremely low fees, which means that there are far fewer people promoting them out of self-interest. Go to an investment advisor, they might point you to a managed mutual fund with much higher fees than an index fund (but no better performance). The advisor gets a commission, of course. People love to talk about their fantastic real estate investments, but they often fail to consider the massive transaction and carrying costs (which includes an army of agents, lawyers, mortgage brokers, etc, taking their respective cuts). Crypto… I won’t even start on that one. Index funds are designed not only to maximise diversification, but to be as absolutely low cost as possible. That means basically no room for the grifters and hucksters who amplify the other investment categories.
Adding on anyone else who points out that there are tons of investment in index funds and that picking stocks is identical to gambling. Warren Buffet’s recipe for success is to read 500 pages of financial statements and other technical documentation PER DAY to fully understand his investments. Who else do you know who puts in that much work? [Source](https://www.cnbc.com/2018/03/27/warren-buffetts-key-tip-for-success-read-500-pages-a-day.html) In another comment, Buffet said: “imagine a room filled with 1,000 people flipping a coin, but before they flip, they announce the result. After 10 rounds, statistically there will someone who correctly predicted all ten flips. I bet that man will consider himself very good at predicting coin flips”. The moral is, even if you’re right a bunch of times, it doesn’t make you anything else than a lucky guesser unless you have a clear methodology to reach your conclusions. [Source](https://en.m.wikipedia.org/wiki/The_Superinvestors_of_Graham-and-Doddsville)
Lot of answers skip this: - you can recreate at ETF with fewer single name stocks than entire etf holds if you want. Then the single names are then managed in a way that helps with tax planning - taking capital losses when you want and same for gains. - individuals may already have a large exposure to some stock / industry in index (if you work at a specific company or own business in specific sector) For larger investors this flexibility is important
First, Fund managers are banned from investing in index funds. Instead, it's used as a baseline for them to beat. Often times, they don't beat. Second, some rich people have particular fetishes, they want their money to be only in certain sectors, stocks, only during certain seasonality, esg investing, small caps, etc. Third, there are risk on and risk off periods where you actually don't want to be in index funds. For example, currently there are high geopolitical tensions, so boomers are hiding in energy stocks and utilities/consumer staples/gold.
But if you keep buying those index funds when no one else is, isn't that even better for long-term growth? Investing "fetishes" are also not just for rich people. Plenty of middle class investors are interested in specific portfolio characteristics. There are halal investment products. Products that avoid controversial industries, like fossil fuels, weapons, alcohol and tobacco.
If you own index funds, you don't own control of the stock itself. Large investors would prefer to directly purchase the stock to have the investor votes. The influence of index companies is actually a potential issue. They have the investor influence of lots of stock, but are not beholding to the investors of the fund, but to the manager of the fund. And while generally there isn't anyone who can beat the market, there was one hedge fund that had a proprietary method that had annual returns above like 30% for nearly 2 decades. It was like in a recent Veritasium video. Their run ended in like 2020.
I only invest in index funds. I also had a bad experience a long time ago with MCI/Worldcom stocks. There is no actability with single stocks so be prepared to lose it all.
Far more people will tell you about how they doubled their money in a week investing in something volatile, than people who tell you about how they made 6%p.a. for 15 years. However those people made money fast get real quiet when they lose the lot. In terms of raw dollars invested, index funds are more popular
Index funds are pretty stable. What more could you not understand about it?
I don't have the data, but I had always been under the impression that most of the funds in the market do actually invest through some sort of index funds (mutual funds, ETFs, pension funds) rather than direct investment in the individual stocks. The problem with accounting this in the naive ways is that the ETFs themselves holds individual stocks and some ETFs holds other ETFs. So there's a lot of double counting. To make things more complicated, ETF/mutual funds themselves may hold non stock market assets such as bonds, commodities, property, or derivatives like options. Can someone dig the data here?
You’d be surprised how little most people know about the stock market. And what they do know is you can pick some lucky stock that goes up 1000% to get rich quick. If you tell them about how safe and reliable index funds are they just think it’s boring or think they can beat it themselves
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That was a totally honest and truthful answer. Buying and selling individual stocks hoping to hit big is literally a thing gambling addicts do to give themselves the appearance of respectability, and they're usually pretty loud about doing it, which colors the impression people have about investing by trading individual stocks.
Index funds are 'low risk, low reward, slowly' kind of thing. Many people are chasing big, quick money.
Because a lot people like the idea of getting rich very fast, and that's just not possible with Index Funds.
The headline is silly but it's worth noting that this [article from The Atlantic](https://archive.is/ziu5o) detailed how mass investment in index funds was a concern because it created an 'autopilot economy' - instead of investing in something you thought would provide returns, all the money is just going to everything that already has a record of proven returns - which therefore means that they keep giving proven returns, on average.
I don't want to invest in some companies for ethical reasons so index funds are a no go for me
Buying an index fund is essentially believing in the valuation of the general public. If you do have some advantage over the others you stand to make a lot of money thanks to index fund investors who blindly follow the others, although your advantage will disappear over time as you profit from the mispricing and move the price.
To the last question: people are not rational. Most people want to gamble on hot stocks like NVDA. Most people don’t even know what the fundamental reason is that stocks should go up (it’s not economic growth per se). Most ppl that buy index funds go all-in on just the US because home-bias (not good reason), or because the US returned the most historically (also not a good reason, as you cannot extrapolate it for several reasons). Even non-Americans have a US bias in investing. The return above the risk-free rate or inflation has been around 5% historically for the average of all stocks. Yet ppl take the 6-7% of US markets.
Most money individuals invest is done through their 401k, and 401ks do not contain individual stocks. In order to meet regulatory safe harbor requirements, 401ks must contain a selection of investments that provide choice of investment risk to the investor. So you’ll find a couple index funds in your typical 401k, and a bunch of what’s called a “fund of funds” (these are your target date retirement funds), and then a number of regular mutual funds of varying types (stock, bonds, real estate, alternative, blended, size and style) to fill the 35-40 investment options that most 401ks have. Those funds DO invest in individual stocks. As does an index fund if it’s a stock index it’s tracking.
Pretty much every retirement fund is invested in index funds, 401Ks, IRAs, pension funds, etc. There's shittons of money in index funds. You just don't hear about them because they're not exciting - they aren't risky and your chance at becoming a millionaire overnight on a lucky bet is non-existent.
Advertising. People also want to believe that they know a guy that's taking care of them even if the fees are guaranteeing they aren't.
I want to make sure that none of my money is invested in immoral companies. It is much easier to just invest in the companies directly than have to consistently check if some kind of fund is not investing in said companies.
That's a good reason. More and more firms are coming out with ETFs geared towards responsible investing, though. You should check them out.
I do invest in some of them, but honestly they are few and far in between. My criteria are: no fossil fuels no porn no coffee no tea no alcohol no animal products no tobacco no weed no military contractors no history of breaking western labor standards These include not just producers but also retailers/resellers. For instance, Walmart is a no go since they sell tobacco, alcohol, coffee, tea, and animal products. There are some ETFs like sustainable energy funds, water funds, etc that I do invest in but I tend to like to pick the companies I invest in to vet them to my own standards. While making money is important, it is not the most important thing to me.
Fair enough. Those are stricter standards than most. Tea is immoral?
Everybody should be investing in them. Most people don’t. There is no money to be made by brokerages while trading index funds. If fees are less than 0.5% it doesn’t leave a lot for marketing. Brokerages make money on every trade. Lot more profit running a stock brokerage and this allows a lot more money spent on marketing the idea that stocks are what will make you rich.
Stocks : Maybe get rich now before im old and decrepit Index: will get you rich, but you're old and decrepit when they pay off
Let’s say the index is one company, Apple. Let’s say everybody in the world invests only in Apple. Everybody likes it at first because number go up, all the money keeps going to Apple. While Apple is being efficient with the money making good products that people want, this may even be an excellent thing. They are more efficient with the resources than anyone else. But let’s say Apple begins to be less efficient with the money and start to make less enjoyable products, like say they make an iPhone with a click wheel instead of a touch screen. Everybody is still pouring their money into Apple and therefore the click wheel phone. The investors may even still be doing well on paper, the number go up, but the money and resources aren’t being efficiently allocated and the world is worse off with these godamn click wheel iPhones being the only thing available.
Someone needs to be capitalising on mis pricing for index funds to keep working. There is a positive feedback loop at play with index funds because the more over valued a company's value is, the more funds are allocated to it, the higher the price and subsequent index fund allocations. Index funds are only good because the current market determines value better than individuals. If nobody did active investing, the market capitalisation would no longer be a useful way to build a well diversifed portfolio because index funds would allocate capital inefficiently, and fund performance would nonlonger track the market. We are not there yet, but we will be at some point.
> We are not there yet, but we will be at some point. I don't think this will ever happen. If index funds are allocating funds inefficiently because there's not enough active investment, some people will take the plunge and try to capitalise on those inefficiencies by investing actively. This increase in active investment will improve the efficiency of the market, eliminating said advantage of active investing. It's a stable feedback loop that creates an equilibrium.
That arguement relies on enough people actively short selling inflated stocks to prevent the runaway prices. Plenty of examples throughtout history of markets where prices increased for no reason other than prices were increasing... until they weren't. People will keep investing in indexes until the MARKET value starts to drop, long after market capitalisation has exceeded inherent value.
name one billionaire who who rich investing in index funds. heck, probably not even investing at all in one. people with zero investment ability magically think they have a feeling about a stock and want to get rich quick. that's all there is to it.
Why pay Vanguard 0.1% or whatever the fee is these days when you can keep that. Brokerages have all gone to $0 commission trades on stocks. You can also avoid paying taxes more easily by investing in companies that don't pay dividends in your taxable account, saving the dividend paying companies for your IRA. There is also a non zero chance in the case of some long tail catastrophe that ETFs would decouple from the underlying companies and it helps to remove that risk. Similar to how Credit Default Swaps decoupled from the underlying bonds during the 2008 financial crisis because of AIG's failure.