Nov 07 2008
How Index Funds Have Fallen Out of Favor
Back when I first started investing, index funds were the lazy man’s way to increasing their portfolio. However, in an interview on Moneyshow.com, J. Michael Martin of Financial Advantage explained that index funds have fallen out of favor. He knows that someday they will come back into favor, but for right now, they are not the best tool to rev up the porfolio.
The easiest way to explain this is with the analogy. Remember when times were very good, there was no war, inflation was being “managed” by the Fed to run about 2-3%, and people were spending the economy into a boom. If you could have somehow bought a basket of shares of restaurants in Minneapolis or Des Moine, a basket that contained the good with the bad, you would have had the benefit of the good times and people eating out in every sort of restaurant. That was what it was like having an index fund.
Enter bad times. Now wallets are slimmer, customers are more choosey about where they eat out. Suddenly restaurants with lousy food, lousy service, long wait times for food, or just incompetent bookkeeping are going out of business “faster than a hot knife goes through butter.” Who would want that basket of all those restaurant companies now? Some of the shares are worthless. Such is the case with current investment strategies. Rather than take on all of the companies that would end up holding losing stocks, why not focus on excellent mutual funds or single stocks that will do well.?
That is why index funds are currently out of favor. And once these bad times are over, then the people who are so different from me can go back to the mindless way of investing. Until then, you might just have to work a little harder to be successful.
