Index. Index. Index

Asset managers are compared to the indices, things like the Dow Industrial Average, the S&P 500, and the Nasdaq 100.  These indices reflect the performance of the basket of companies that make up that given index. Some are added over time, while the same number are reduced, automatically re-balancing with companies that are doing well, getting rid of the poor performing companies.

It is with this in mind that professional asset managers have been compared. Did the asset manager beat the index this year? Did they beat it for five years? Did they beat it for ten years? Twenty? 

Research shows that so few money managers beat the indices over long periods of time. The professionals cannot outperform the benchmark index consistently over many years. So why would I be able to outperform consistently? I likely cannot. And that has been the conclusion of money managers and retail investors alike. The result has been a proliferation of index or passive investing. Buy the S&P 500 index of 500 US companies, the names of which will change over time, and you can watch the investment grow in value without having to pick the underlying company winners and losers. 

Personally, I like the S&P 500 and the Nasdaq 100 indices. There are various funds marketed by different firms, with different approaches like equal weight or overweight.  Equal weight funds hold every company in the same amount (dollar value not share count), while overweight allow for higher concentration or dollar values to be allocated to some companies over others.

What can investors expect from the two different approaches? Equal weight tend to have less concentration risk but higher volatility due to smaller-cap bias and rebalancing. Conversely, overweight approaches tend to have higher concentration risk and higher potential for both gains and losses.