#MGoMoney: The Market & Your 401K/Investments

As the term diversification is normally used, a Vanguard total stock market fund is extremely diversified because it has every industry represented and large caps, small caps, and everything inbetween.  Adding an international index fund will increase diversification further.  A bond fund will diversify you further, but don't put too much in there, especially if you're young. 

Short answer:  no advantage.

Long answer:  I started investing a good 25 years ago. At which point, there were no index funds. Or they were very new.

Longer answer:  I would probably go with an aggressive indexed fund today. But I at least slightly like being able to focus on segments of the market that I like, which may differ slightly from an index fund.

A total stock market fund tends to skew toward Domestic Large Caps somewhat. 

Individual funds that track Large Caps, Small Caps, and Internationals can even that out more.

A total stock market fund can still be pretty good though.  Just make sure you get one that has a healthy mix of Internationals if you are only going to have one.

   

To answer your question, it depends largely on who the investor is and what their strategy is. 

For most people, index funds are a decent vehicle if they are designed to mimic overal market performance. When you consider total cost, historically they often outperform mutual funds and other actively managed assets (somebody's diversified "portfolio")(yes, there are plenty of sub quality professional investors). Even if something is actively managed appropriately,  its quite possibly going to pass off market hurt to the consumer, and cut steeply into gains. So, for most people, the benefit of an index fund over time is that it's a low cost relatively safe investment strategy that works WELL. 

There are only several issues with index fund investment, but most retail investors should be happy to live with these, presuming they are not pulling out during a dip. 

1) Index funds are overweight on the overweight stocks, and underweight on the underweight stocks. Index funds are (usually) weighed vehicles that take the overall market cap of a sector or whatever. As a specific stock becomes overweight and takes up a larger share of the market than it should, the index fund purchase ignores this, and you end up propping up overweight stocks. Undervalued stocks are purchased less than they should be. This potentially becomes an issue especially in indexes that have a smaller number of stocks that make up the portfolio. For example, indexes designed to mimic the DJIA are comprised of almost 10% Boeing stock. I'm not saying that's a bad investment, but there is a theory out there that large firms are becoming more overweight not simply because of their large weighting in index funds and steadily decreasing percentage of professionally managed money. (There is theoretically an inflection point beyond which the amount of active (or emotionally) managed money that may pull out based on news, earnings or developments, may not be enough to not have a zombe index fund purchase waiting to prevent a drop). At that point you have a run-away stock, and there are one or two out there. 

2) Index funds are not reactive. They are often designed to grab all of a certain type of stock, which is great when everything is hunky dory, but could be devistating if there is a game changer that affects the underlying sector. For example, PNQI attempts to grab some of everything internet, but it's not actively going to protect itself if there is some sort of market shift or emerging technology, especially if its not publicly owned. 

3) Index funds are becoming more volatile in market drops as they become more popular with investors. We are actually seeing this right now. The increased volatility (large volume) is hitting the market as a whole, even though certain stocks are very well positioned for growth under a higher inflation higher rate environment. (JPM for example). This doesnt impact an investor unless they either wish to sell quickly based on new news, or may have to sell based on changing financial situations. While this is proving to provide a lot of tasty arbitrage for strategically placed investors, it's not a big deal if you just ride it out. The point here is though, that even the market as a whole is not a completely diversified strategy if that's what everyone else is doing, for if you feel you have to sell, and so does everyone else, then that's not a place you want to be in. 

 

Which cryptos are you into? 

Which cryptos are you into? 

Which cryptos are you into? 

Amen. Just look at the year to year charts for Bitcoin. It always dumps in February like this, then makes gains for the rest of the year. This freakout is nothing new, and if you ask me, nothing to worry about (especially with the Lightning network on the horizon)

Agree that most don’t understand cryptos, but a first rule of investing should be, never invest in something you don’t understand.

You would recommend B if it were at 100k, down from a high of 200k. To make your statements, you have no idea what your price point is or what a decent valuation is. Are you really arguing there is some proprietary technology worth a certain price, when the whole idea is open? There is a price at which even the best investment becomes a bad purchase, and you are way past it on speculation alone. Don't get me wrong, I may have used the ugly to mine a bit years ago as a novelty...but I wrote more above re specifics.