Question

For this discussion forum, discuss the reasonableness of the thesis that investors should forego investing in individual stocks and bonds and instead place their monies into "index funds" and "exchange traded funds or ETFs". What flaws can you uncover with this approach? How does this approach fair in today's markets where we have significant swings in security prices as well as those of index funds and ETFs?

Answer 1

Index Funds are like mutual funds with a portfolio constructed to match or track the components of a financial market index.An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.

Index fund investing is better than investing in individual stocks because it keeps costs low, removes the need to constantly study earnings reports from companies, and almost certainly results in being average, which is far preferable to losing your hard-earned money in a bad investment.

Index funds generally tend to be less volatile than most individual stocks.

Exchange trade funds, or ETFs, represent baskets of securities traded on an exchange like stocks.ETFs can contain all types of investments including stocks, commodities, or bonds.

ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.Reducing the volatility of an investment is the general method of mitigating risk. Most investors give up some upside potential to prevent a potentially catastrophic loss. An investment that offers diversification across an industry group should reduce the portfolio's volatility. This is one way that diversification through ETFs works in your favor.

Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.Exchange-traded funds (ETFs) may also be advantageous if you are unable to gain an advantage through knowledge of the company.