Your friends can’t stop talking about how remarkably well their investments are performing. While being extremely happy for them, you’re turning green from envy. You want in on the action, but have no clue where to begin.
Most people will advise you to invest in an index fund, but I say why clip your wings when you’re meant to fly high?
Sin #6: Envy
Envy is a nasty emotion. It creeps up on us and takes hold without us even knowing, which is why we need to be cautious of ourselves. Index investing is largely fueled by fear, self-doubt or pure laziness. Investors are scared to take charge of their investments, because they doubt their ability to invest successfully. The latter stems from frequently reading headlines of professional fund managers failing to beat the market. Naturally you would be thinking, “If the professionals aren’t even getting it right, how will a novice investor succeed in outperforming the market?”. But self-doubt has no place in successful investing. It will lead you to settle for the "easy" option of trying to imitate the market.
Although investing in an index fund seems like a safe option, it isn't all moonshine and roses. Let’s take a look at why imitating the index isn’t a recommended strategy for the enthusiastic value investor.
It's All Passive
By their nature, index funds are a form of passive investing. The fund does your job for you by following the market’s movements as closely as possible. But beware, laziness is dangerous.
Index funds react to the market as it happens, meaning you can’t plan for the future and need to simply trust the system works. This isn’t a problem when the market is performing well. But it becomes a problem when the market’s top stocks are inflated in value and are actually risky investments. An index fund can’t differentiate this, which means it won’t be able to adjust accordingly to weather a market crash. The value of your index fund will be wasted away, whereas a self-managed value investing portfolio might have avoided such a catastrophe.
Index funds invest in the best performing stocks on the market according to their specifications. This is a dangerous system to follow whole-heartedly, though. Just because a company has or is performing well, does certainly not guarantee that it will continue to do so. Index funds force you to succumb to herd mentality by agreeing with what is trending on the market. Even if you research stocks for yourself and decide which companies are great investments, you can't do anything about it. It’s all passive, which means you can only sit back and watch, hoping the market performs well.
No Personal Control
Stock market indexes such as the S&P 500, the Russell 2000, DJIA, etc. are made up of the biggest companies in a country. Index funds mirror these, investing only in the companies listed in a specific index. Say you’re an animal rights activist and one of the companies on the index tests their products unsafely on animals. Or one of the companies is a competitor to your own. Whatever might direct you to be against investing in a particular company has no place when choosing an index fund, because you have no personal control over which stocks are included in your chosen index.
Investing leaves no room for you to doubt yourself. Anything is possible if you go about it in the correct manner. Investing in a diversified portfolio consisting of 3D value stocks combined with an intelligent stock picking and portfolio management tool will deliver handsome, low-risk returns over the long haul. Don’t box yourself in. Aspire for success. If you avoid timing the market, do appropriate research and stay patient while investing according to the four intrinsic principles of a successful value investor, you will soon be outperforming the market and making your friends jealous.
Adapt the safer, flexible and more rewarding option of individual value investing rather than imitating the index.
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