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  • Writer's pictureIshfaaq Peerally

Investing in INDEX FUNDS ๐Ÿ’น

Let's start with some news and updates about my portfolio. $PE had great earnings and as a results, the stock price is over 10% up today despite the fall in $OIL prices. I won't be too excited about that though. As we saw recently with Concho Resources $CXO , things can be very volatile in the current oil prices environment, but long-term, my opinions on both these companies didn't change. $DIS failed to beat revenues and I'm not surprised about that. The expectations of Wall Street were really too high on this company. Hopefully, the stock price will keep falling so that I can buy more. I also added a $GLD and $BSV to my portfolio. As you know, I'm looking for gold mining companies to invest in. This process can take weeks and even months. In the meantime, I believe that $GOLD prices will keep rising in the coming months, therefore, I'm investing in the Gold ETF. When I find the right gold mining company to invest in, I'll invest. I just don't want to rush things.

Investing in INDEX FUNDS ๐Ÿ’น

Index funds are one of the greatest inventions in finance. They are the most important elements in the democratization of finance. In the past, only rich people could invest in the stock market and that's why you will see people such as John Pierpont Morgan in the US and Nathan Mayer Rothschild in the UK having unbelievable control over stock prices. But now, there is no single person who have control over the whole market. The stock market has never been so democratic and that's because of index funds.

If you look at the holders of most big companies such as Microsoft $MSFT or Apple $AAPL , you'll see that the largest holders are Vanguard Group or State Street or BlackRock or other similar companies managing investment funds. All these pension funds, 401k, etc are in index funds, even the Norwegian Sovereign Wealth Fund.

Therefore, it is very important for you to understand how index funds work. Investing in an index fund means investing in an index such as the S&P 500 $SPX500 , The Dow Jones Industrial Average $DJ30 or the Nasdaq100 $NSDQ100 . This is the easiest thing to do for anyone. You can even invest in an ETF which follows an index. For example, the $SPY .If you don't know anything(you are probably not one of my subscribers, then) about the stock market, then this is the best thing to do, invest in an index funds. most traders fail to beat the market, therefore, it is better to be just as good as the market. But as you become better, indices are not the right thing.

Let's take for example, the Standard & Poors 500. It is an index with the 500 largest companies being traded on American exchanges weighted according to market cap. Only some of these companies actually have a big impact on that index. For example, companies such as Microsoft $MSFT , Apple $AAPL , Amazon $AMZN , , Google $GOOG ,Facebook $FB , Berkshire Hathaway $BRK.B , JPMorgan Chase $JPM and Johnson & Johnson $JNJ . These are the companies moving the index because they are big. A company such as Nike $NKE for example has about one-tenth the weighting of Microsoft. If you take the example of the Nasdaq 100 $NSDQ100, 40% of the index is only 5 companies: Amazon, Microsoft, Apple, Google and Facebook.

The main rule of investing is buy low, sell high. But when you're investing in an index fund, what you are really doing is buying high and selling low. For example, right now, the largest company on Earth is Microsoft and it has the highest weighting on the S&P 500. But once Apple or Amazon becomes number one again, the weighting of Microsoft will go down. Therefore, what you are really doing when investing in an index fund is buying those companies which are peaking. You are buying them when they are high and not low.

I am not telling you not to invest in index funds. This is the best thing for most investors. Even Warren Buffett cannot beat the index. But if you are a young investor with let's say less than $1 million to invest, you can find better opportunities to invest instead of just investing in an index. Of course, it demands a lot of work and most people will be better off just investing in the index. With the S&P 500, you can expect 10% per year with dividends reinvested and even if you make 11% per year, you're doing much better than most people. If you have more time, you can aim 15% or even 20%.

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