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Some thoughts about index investing
I think that as investors, a lot of us are chasing the next big thing, and it’s easy to fall into a trap of under diversifying. A lot of investors have done really well for themselves in the tech sector this year, but a worrying amount of people have a huge majority of their portfolio in a couple tech stocks, which may not be the best option long-term.

I’ve long advocated that we need to rethink our understanding of the tech industry, as risk is very different between $AMZN, $TSLA, and $NET, but constantly chasing huge gains leads to underexposure in other areas, increasing risk, while not proportionally increasing reward.

There’s nothing wrong with chasing growth. I chase growth myself, but I also know that I can’t time the market, and if my portfolio is all growth, there’s a very real chance that it could mostly vanish just as fast.

I think we really need to reevaluate how we view index funds. For many people, it’s an effective way to build diversification cheaply while still maintaining a section of your portfolio devoted to high growth.

Why do I believe that this will result in higher long-term returns?

We live among one of the most exciting eras in human history with a constant stream of innovation. This has resulted in an incredible amount of new and exciting companies popping up left and right. While this tech revolution has been building for decades, it’s only recently that it’s been booming.

The problem? Winners now could just as easily become losers tomorrow. Apple wasn’t the first computer manufacturer, and 20 years ago, IBM was a huge home PC manufacturer. The first mover advantage, long-term, is overblown, and that doesn’t always bode well for new and innovative companies.

If you look at my portfolios, most of my holdings are in index funds, and I like that. I still chase (and have gotten) massive growth in many of my holdings, boosting my returns to a level I’m very happy with, but I also feel comfortable knowing that I’ll be just fine in economic downturns or if my big winners don’t actually turn out to be big winners long-term. Index funds also allow me to invest in companies I may not know as much about, as I think you’re kidding yourself if you think you can invest in companies and have success if you don’t do weeks or months of research first to understand how they make money.

I realize many may disagree with this viewpoint, but this rapid growth doesn’t last forever. For the last few years, investing has been easy: just invest in tech and make 40% each year. At some point though, the growth will slow, stocks may not crash, but undervalued companies now will likely drive future gains then.

(Sometime in the next week, I’m going to be posting my analysis and complete modeling of $ZTS, so stay tuned for that)

Austin Cox's avatar
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