The following is my answer to a Quora
question: “What
do professional investors think of Warren Edward Buffett’s advice that
investing in index funds ‘makes the most sense practically, all of the time’?”
This is absolutely correct. Investing in index funds affords you an
opportunity to spread your risk without the attendant cost and effort of
picking individual counters across industries, regions, and instruments. Picking individual counters involves a
tremendous amount of research, qualifying the underlying company, and making a
viable prediction of its performance and how it might affect the stock price.
And then, buying enough of that stock for your portfolio. It is a tedious, and more importantly, an
expensive exercise beyond the budget of the ordinary investor. Even should they have the funds, having the
means to analyse the market and track the individual stock is beyond the
capabilities of most people. Fund houses
have dedicated research teams.
Ultimately, investing in an index fund,
and adjusting your weightage from time to time is a lot easier. Left by themselves, your returns compounded
will guarantee you a profit the longer you keep it because the market always
trends up. The underperformance of a
single stock affects your investments marginally.
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