Investing Tutorial 3: Why not to invest in index funds
Channel: Investing made easy
Date: 2016-10-03

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Why not a stock index fund? Though popular, there are three things you should re-consider about index funds.

1. The fees you pay for an index fund (this can add up to a nice car over the years)

2. The weighting towards holding more expensive stocks (which can mean sacrificing higher stock returns)

3. You own the index fund, not the individual stocks (there's a risk in that).

So, watch this video to learn why an index fund is a good solution for long-term stock investing but that it's not the best solution for you long term stock investing.

Watch the video to learn more.

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Transcript
So, you now know that it is a better strategy to buy and hold stocks.
The question now becomes: should you buy an index fund?
Generally, an index fund is a really good idea for long-term stock investors.
But, it's not the best idea for these three reasons: First, an index fund costs money. If you give your money to a financial advisor you will pay as much as 1% to 2% in management fees. That means, if you invest as much as a few thousand a year, it could add up to hundreds of thousands after 30 to 40 years. That's as much as the cost of a small house. Now, an index fund is cheaper, but it could still add up to as much as the cost of a nice car. And, you want that car to be parked in your own Garage,  not in the garage of your index fund manager.
Second, indexes are weighted by the size of the company, which you may not be aware of. So the stock of a large company has a bigger share of the index than a smaller company. This means that if the stock appreciates, its share in the index also increases. The result is that you will own more of the expensive stocks than of the less expensive  stocks. That eats into your returns.
Last, but not least, you have risks. You don't actually own the stocks that the index fund owns. You just own a part of the index fund. This is called counterparty risk. That is a risk not worth taking.
Remember, if you want to buy and hold stocks, don't buy an index fund for those three reasons: First, it costs money. Money you don't need to spend. Second, it has lower returns because it holds a higher share of more expensive stocks. And third, it has counterparty risks that you
don't need.

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