Thursday , 7 December 2023

Index Funds are a MUST in Every Long-Term Investment Portfolio – Here’s why

According to Ted Cadsby, in his book The Power of Index Funds – Canada’s Best-kept Investment Secret:

Indexing is the best way to maximize your long-term returns…and is relevant for every single investor, without exception…Every investor, no matter what stage of life they have reached and no matter how much they have to invest, should hold index products as the foundation of a diversified, long-term investment portfolio…

While an index fund aspires to do no better, and no worse, than the index it is tracking, it will, however, be destined to always do a little worse, since the [modest] fee of the fund will prevent it from generating the exact return of the index…

The index is a hard benchmark to beat in [almost] all markets…[Whether you manage your own portfolio or have it managed on your behalf the fact is that] the [vast] majority of active individual investors have underperformed the index in most years. The ones that are able to beat the index don’t beat it by much and the majority that underperform the index tend to underperform it by a lot…

Indexing outperforms most individual investors because of:

  • the lower fees and brokerage commissions charged by indexed products;
  • the lower trading costs of the buy-and-hold strategy inherent in indexing;
  • the deferred capital gains tax that results from less portfolio trading;
  • the lower cash holdings (which otherwise drag down performance over the longer term) in index funds;
  • the difficulties active individual investors face in trying to rationally keep ahead of the consensus view of market prices and
  • the purity of indexing which allows a more effective management of asset mix, which is the most important part of the investment process…
[In spite of the abovementioned benefits] there is a place for some active management in everyone’s portfolio – particularly in those markets that are less efficient and, therefore, offer the greatest opportunity for the active individual investor to add value beyond the index…

Index funds are the best method of indexing for most individual investors. Thet are easy to buy. there is no commission for purchasing or selling them. the tax consequences are straightforward and beneficial in terms of capital gains. Dividends and capital gains distributions are reinvested automatically into the fund so your money keeps working for you…

The beauty of index funds is that you can pretty much forget about them once you have invested in them. Just check once a year to see how the tracking error is against the index that the fund is following and make sure that the management expense ratio has not been increased…

Indexing is an investment strategy that is strongly favoured by probabilities – more so than any other investment strategy – so I ask you: No matter what your net worth, or how sophisticated your investment knowledge, why wouldn’t you want to have investment probabilities working for you, instead of against you?


Yes, why wouldn’t you invest in a broad index fund when research shows that you that, in spite of your prior misconceptions and your financial advisors self-serving, or just erroneous, advice you will likely be 60+% further ahead in doing so!!


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