Key insights
- The author argues that the primary advantage of S&P 500 indexing isn't diversification, but its ability to capture major market trends and automatically shed failing companies. This ensures long-term participation in market growth, a feat difficult for active stock pickers. The author suggests indexing as a core portfolio holding.
I always treated indexing (in particular SP500) as a means of diversification, thus a "safer" investment. The fact that very few of the actively managed funds can consistently beat S&P500 demonstrate the cynical nature of the investment industry. Only recently did I understand that the true advantage of indexing is not diversification (which is rather easy to accomplish, say, with a mix of 10 stocks from different industries), but something else:
- It never misses anything big. Be it PC, internet, AI revolution, it always has them. 2. It never hold on to a disaster. It automatically reduces and then eliminates the likes of Sears, Kodak, Blackberry, Blockbuster. 3. Time is on its side. 4. The tranquility of participating in a dangerous game, of course unless it's 1929.
Very few stock pickers can accomplish that, of which I'm completely convinced every time I look at my miserable portfolio. Thus indexing should be the first investment of any portfolio. But most of us, due to our ego or dream, will continue the epic saga of stock picking.