What is index investing and how can you benefit from it?

Sana Al-Badri
May 14, 2020 · 4 min read

At Sagefund we endorse a time-tested investment strategy called “index-investing”. It’s a strategy designed to ‘match the average market performance, not to beat it’. This may sound lame, but performing ‘averagely’ on the market is a big win (unlike in other areas of life!). Index investing is based on a principle called the ‘Efficient Market Hypothesis (EMH)’, which won Eugene Fama and several other economists the nobel prize in 2013.

They successfully showed that it’s impossible to predict which company stocks will go up or down in price, and that all knowable information is already priced into the current value of a stock.

For example, when news breaks that iPhone sales have dropped, this information is acted upon so quickly, that the overwhelming majority of traders will not benefit from selling their Apple shares.

The findings of the Efficient Market Hypothesis (EMH) are revolutionary, because the stock market is dominated by asset managers, who claim to beat the market — at a hefty fee of course. They claim to be experts at finding and buying winning stocks and selling losing ones. Yet study after study shows that 92% of active asset managers make incorrect judgements and as a consequence perform worse than the market average. Moreover, identifying successful asset managers is just as unlikely as beating the market. One study even showed that investing randomly is better than any technical trading strategy.

Because of this research, index investing has not only persuaded millions of private investors, but also institutional investors. For example, the government of Norway and Sweden use index investing to sustain their pension system and they have some of the wealthiest retirees because of it. And frankly, we think more countries should do the same!

What can you learn from this?

We recommend you invest in a well-diversified global portfolio, which should include different kinds of assets, such as stocks (owning shares in businesses), bonds (loans to governments and business), real estate, etc. This is done easiest and most cost-effectively through ETFs (exchange traded funds). ETFs are similar to a basket of stocks, often containing hundreds of stocks, which are designed to match the performance of a broad market. Think of the DAX (in Germany) or the S&P 500 (in the US).

By buying ETFs, rather than single stocks, you ensure your money is ‘diversified’ across hundreds of companies. This means that you don’t need to be correct in predicting whether Apple stocks will grow or fall in value. Some of the stocks inside your ETFs will grow and some may fall, but whatever happens you will make the average return of the market (which, of course, varies each year).

The Dow Jones (USA) has grown 1700% over the past 100 years (adjusted for inflation).

But what does average mean? A 100 year analysis of the American stock market (the oldest and most representative stock market in the world) shows that 80% of the time an investor made money in the stock market. Similar analysis also showed that the stock market has a positive year 74% of the time, and that the growth of the positive years outsrips the fall in price of the negative years. Over the long-term (7–20 years) you can expect to make an average of 7% per year, which is the safest high-growth investment out there. John Bogle, the founder of Vanguard (one of the worlds largest fund managers) and pioneer of index investing, nailed it when he said:

“In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses.”

This gives room for a lot of optimism and shows that using ETFs as a means to save for bigger goals is a great option. At Sagefund we built carefully diversified portfolios based on passive indexing strategies, which are designed to meet your savings goals, while ensuring sustainability. We rebalance whenever necessary, observe when they require adjustments, and ensure that the selected ETFs are the best in their category. Join whenever you are ready!

We are a start-up and would love you to join our exiting beginnings!

So, if you want to become a beta-tester for the product as well as learn about sustainable investing, join our community at our Facebook group — Sagefund Closed Beta.

Or sign-up for our monthly newsletter: https://sagefund.eu/sign-up

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