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Beginner question about index funds
Joel
Posted: 20 May 2018 09:13:28(UTC)
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Joined: 19/05/2018(UTC)
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Hi!

I´m new here, and new to the whole market. I have been researching index funds yesterday and thought I´d start investing but there´s a couple of things I´m uncertain about. From what I understood you can use compound interested and invest in low fee index funds monthly long-longterm, say about 35-40 years, for example I would deposit 200$ monthly in low fee index funds internationally for diversity for 35 years without ever withdrawing any money. Is this a valid strategy, does it work, is it worth the effort? Perhaps I misunderstood the concept of it. Sorry about my complete lack of knowledge in the subject, but any help is greatly appreciated!

Using the compound interest calculator it looks very tempting to do so but I don´t know if you can apply it to reality?

Thanks!
1 user thanked Joel for this post.
Guest on 21/05/2018(UTC)
sandid3
Posted: 21 May 2018 11:51:36(UTC)
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Food for thought -
Quote:
The Hidden Risk of Passive and Index Hugging
http://rick.bookstaber.com/2018/05/the-hidden-risk-of-passive-and-index.html

What is wrong with passive investing and index hugging? One problem is that these strategies often use ETFs. I wrote about the potential for ETF meltdown last October, with a follow-up shortly thereafter, so I won't belabor that here. Another problem is that most passive portfolios follow a cap-weighted index. Recently I also wrote about the risk from this. So I won't repeat that here, either. What I will do is add another risk that comes from the passive and index-hugging approach to portfolio management, the resulting lack of diversity in investment strategies and outlook.
:
The risk, then, is that with us all crowding into the same passive investments we will not have the diversity to adapt if something bad comes along. But it is actually worse than that. Being all the same might actually create the bad thing that comes along. Because we don't just live in the ecology, we create it, and we create many of its shocks. If things start going in the wrong direction, the effect of all of the passive investors moving in the same way, and the lack of deep-pocketed investors ready to take alternative tacks, will itself create the dynamic cascade.

Table d'hôte or à la carte for the long run?
Tom Bards
Posted: 21 May 2018 11:59:25(UTC)
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Yes, essentially that is how it works. Compound interest is incredibly powerful over long periods of time.
mcminvest
Posted: 21 May 2018 15:53:02(UTC)
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sandid3;62570 wrote:
Food for thought -
Quote:
The Hidden Risk of Passive and Index Hugging
http://rick.bookstaber.com/2018/05/the-hidden-risk-of-passive-and-index.html

What is wrong with passive investing and index hugging? One problem is that these strategies often use ETFs. I wrote about the potential for ETF meltdown last October, with a follow-up shortly thereafter, so I won't belabor that here. Another problem is that most passive portfolios follow a cap-weighted index. Recently I also wrote about the risk from this. So I won't repeat that here, either. What I will do is add another risk that comes from the passive and index-hugging approach to portfolio management, the resulting lack of diversity in investment strategies and outlook.
:
The risk, then, is that with us all crowding into the same passive investments we will not have the diversity to adapt if something bad comes along. But it is actually worse than that. Being all the same might actually create the bad thing that comes along. Because we don't just live in the ecology, we create it, and we create many of its shocks. If things start going in the wrong direction, the effect of all of the passive investors moving in the same way, and the lack of deep-pocketed investors ready to take alternative tacks, will itself create the dynamic cascade.

Table d'hôte or à la carte for the long run?


All a bit deep if you ask me with no real substance to the article.
mcminvest
Posted: 21 May 2018 15:58:13(UTC)
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Tom is correct, very powerful. If you look for a good global passive fund it should (but 'past performance' and all that) give you good diversification and hopefully ride a downturn in the market. The Vanguard Life Strategy funds are set up in this way but there are others. Also look here and check Global Equities

https://www2.trustnet.com/passive-funds/
Law Man
Posted: 21 May 2018 16:15:19(UTC)
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Joel: I think your simple, reasonable, question is: Is it a good idea to put £200 p.m. into a World index tracker ETF, in accumulation units; and allow it to grow over decades?

The answer is Yes.

King Lodos
Posted: 21 May 2018 16:15:37(UTC)
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Open an ISA account with Vanguard; go for an accumulation fund; leave it alone.

Indexing is such an easy choice .. Almost any random selection of stocks is likely to beat an index fund, long-term – indexing overweights the largest, safest companies, and random selections of stocks don't.

The difference is, you don't have to do anything with indexing .. Give people lots of choices (not to mention fees and dealing charges) and they will lose money .. It's all very well saying you can be in safer or higher returning selections of stocks, but only a minority can be (after fees), and there are people doing this 80 hours a week.
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