Although indexing is a relatively simple way to invest, there are still important questions an index investor needs to ask. Crucially, you need to ensure that you invest in a diverse range of assets that reflects your attitude to risk. You might also want to “tilt” your portfolio to particular risk factors – small-cap or value stocks, for example – which, although more volatile, have been shown to deliver higher returns over the long term.
Index Investor: How to Win the Loser’s Game
So, we’ve explained how the academic evidence points overwhelmingly to indexing being the best way for the vast majority of people to invest.
Index funds should form the biggest part of every portfolio.
We’ve already mentioned the importance of asset allocation – deciding how much to invest in equities or bonds, for example.
Another key decision is what type – or types – of index fund to go for.
The traditional and still the most common type is the cap-weighted or market value-weighted fund.
One drawback with cap-weighted funds is that as the price of a stock goes up, so does its weighting.
That can sometimes leave you overweighted in a relatively small number of stocks.
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