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.
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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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