What’s Wrong with Stock Indexes and Index Investing

I’ve never been a fan of index investing or benchmarking a portfolio against an index. Passive investing is a different animal in my mind, and certain types of passive investing can be effective. Here’s another explanation of the problems with stock indexes, and it is consistent with views I expressed in the past. There are good, practical reasons why you and most managers won’t beat the index, but you also shouldn’t try. The index has different goals and risks than you do, and you have some practical constraints an index doesn’t have.

The index is a mythical creature, like the Unicorn, and chasing it takes your focus off of what is most important – your money and your specific goals.  Investing is not a competition and, as history shows, there are horrid consequences for treating it as such.  So, do yourself a favor and forget about what the benchmark index does from one day to the next.  Focus instead on matching your portfolio to your own personal goals, objectives, and time frames.  In the long run you may not beat the index but you are likely to achieve your own personal goals which is why you invest in the first place.