How Index Funds Work Ep. 108

We sometimes  become quite loyal to the companies we are invested in. It may be a company we worked for or it may be an investment we inherited from our parents. Oftentimes, people in this scenario have a high concentration of their portfolio in one stock or one industry sector.

The problem with this type of investing is that sometimes companies or sectors falter and this could leave us overexposed and feeling distraught.  Just as if Thriller or Boogie Woogy were to break, Amelia would be disappointed. We don’t want to be overly allocated in one sector in the event that the investment underperforms.

If we’re invested in stocks, it makes sense to have numerous companies, but often a lower cost way that requires less rebalancing is to use index funds.

An example of an index is the S&P 500. The index was created in 1957 and it was designed to represent 500 large US companies. Today there are many different types of indexes to allocate to. 

We can use index funds to allocate to bonds, commodities, real estate, technology, emerging markets, international markets and the list goes on. With index funds we are diversified amongst the companies inside of the index and this prevents us from being over exposed to one company. Also what this does is it allows us to be diversified, thereby not being disappointed if a company underperforms.  

 When the market turns down as it has this year, it's a great time to evaluate how your portfolio has performed under stress and assess whether you need to rebalance to get your holdings in line with your priorities. Perhaps an index fund may be appropriate for you. If you need assistance with rebalancing and accessing whether your allocations are in line with your goals and objectives please call our office at 864.641.7955.

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