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Anonymous

11 Nov 2020

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Can someone explain to me in layman terms what is index investing?

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You can think of an index as a sample of stocks that represents some part of the economy.

E.g. S&P500 represents the top 500 largest companies in the US.

Then, index investing means that you put money in something that just invests in this sample of stocks.

An index tracks the performance of companies that fit their criteria. E.g. S&P 500 tracks the performance of 505 of the largest companies listed in the US stock market according to market cap.

Index investing, usually done through ETFs, gives you market returns. In my opinion, this is the most sensible way for retail investors to invest because

  1. Most people, including professionals, fail to beat the market

  2. There is a real risk of single companies failing(Wirecard), or even a country’s stock market stagnating for an extended period of time (Japan, US during the 2000s) but short of an apocalyptic like event, the global stock market in general will always go up.

  3. It is extremely simple, you literally buy the same ETF till you retire/reach your goal and have confidence that it will go up in the long run, no need to lose any sleep over any short term fluctuations or do any research.

The caveat here being you will NOT get “rich” through this method. A reasonable annual rate of return for a global index would be ~5-7% in the long run, but this is far safer and more reliable compared to any other investments in the market. (Excluding choices like CPF of course)

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Simple terms: investing in a benchmark...

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