If Index Funds are so good why does everyone not invest in them but individual stocks?
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People are schmucks. The want to get rich quick rather than snowball money over years and years. Individual stocks have potential to go up a ton, or down a lot. Index funds are much more of an even gain, though potentially not as much or as quickly.
I want to make sure that none of my money is invested in immoral companies. It is much easier to just invest in the companies directly than have to consistently check if some kind of fund is not investing in said companies.
You do both. Diversify high and low risk.
At the end of the day, even a hedge fund lost to a index fund over time. A bunch of coked up experts who gets paid a lot, put that into perspective.
Vanguard has 50 million customers with $9 trillion invested, mostly in a variety of mutual funds and ETFs. Fidelity, Schwab, and all the big name brokerages do hundreds of millions of dollars in business from funds. I don’t know where you get the idea that people don’t invest in them.
Reasons to choose a stock over a fund are (1) you have an interest in the company and want to directly invest in it, (2) you want to control the number of shares you own and you want to control when or if those shares are sold or additional shares are purchased, (3) you want an accelerated rate of growth compared to what you get with funds, and you have the risk tolerance to do that, (4) you may have the opportunity to buy a stock at a low initial price to make good money from it when you sell, (5) you just enjoy stock trading.
First, Fund managers are banned from investing in index funds. Instead, it’s used as a baseline for them to beat. Often times, they don’t beat.
Second, some rich people have particular fetishes, they want their money to be only in certain sectors, stocks, only during certain seasonality, esg investing, small caps, etc.
Third, there are risk on and risk off periods where you actually don’t want to be in index funds. For example, currently there are high geopolitical tensions, so boomers are hiding in energy stocks and utilities/consumer staples/gold.
Why pay Vanguard 0.1% or whatever the fee is these days when you can keep that. Brokerages have all gone to $0 commission trades on stocks. You can also avoid paying taxes more easily by investing in companies that don’t pay dividends in your taxable account, saving the dividend paying companies for your IRA.
There is also a non zero chance in the case of some long tail catastrophe that ETFs would decouple from the underlying companies and it helps to remove that risk. Similar to how Credit Default Swaps decoupled from the underlying bonds during the 2008 financial crisis because of AIG’s failure.
Individual stocks can go way up or way down. You can 10x your invested money in a year, or you can lose it all. And they drop to 0 more often than they go up 10x in a year. But the potential for HUGE gains is there, and that’s what keeps people buying them.
Index funds are way safer. They’re a tradeoff with much less risk but much less reward. Steady growth of 5-15% per year over a 10 year span is the appeal of index funds – but notice that +1000% in a year is not going to happen (or even +50 or 100%).
It can be smart to have some of both. That way you have a chance for the huge gains of a good stock pick, but you also have much closer to guaranteed income from the index funds to cover any losses. And there will be some losses when you’re picking individual stocks.
But individual stocks have that lottery-ish “maybe-you’ll-100x-your-money” allure so they’re “sexier” than index funds.
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