| One of the most popular investment techniques | | | | outperforming the index. |
| involves investing in and building a portfolio of | | | | Since an investor's success is therefore measured |
| low-cost Index funds. The rationale behind | | | | against an index of some sort, why not eliminate |
| investing this way has a lot to do with the fact | | | | at least one element of uncertainty in a portfolio |
| that many investments will use the index as a | | | | and simply invest in the index itself? Instead of |
| benchmark against which to measure | | | | worrying whether or not your investment is a |
| performance. | | | | good or bad one, all you would have to do is |
| For example, if you were to invest in a large-cap | | | | worry about whether the overall index will |
| fund (either mutual fund or ETF), the manager | | | | perform well for the year, or poorly. |
| who overlooks the investments of that fund will | | | | This technique makes a lot of sense for many |
| be measured in terms of performance. Whether | | | | investors who know what they need in terms of |
| or not that manager's performance for any given | | | | asset allocation (see below) but who also know |
| year is "good" or "bad" will be based on how well | | | | that since so much is "riding" on the index, it is |
| it performs against an actual index, such as the | | | | best to simply purchase the index. The problem, |
| S&P large cap index or the broader S&P 500. | | | | however, is that the index is not always the best |
| (Performance is measured this way because a | | | | place to invest. Investors will sometimes miss out |
| 10% annualized return might not be so hot if the | | | | on great investment opportunities that are |
| index returned 25%). | | | | managed by bright manager by investing in "just" |
| Statistically, an investor virtually has a 50% | | | | the index. There are plenty examples of this in |
| chance of performing better than the index and a | | | | the investment world. |
| 50% chance of under-performing compared to | | | | As for Asset Allocation, as long as the investor |
| the index over the long-term. We say virtually | | | | knows how much of their investment should go |
| because a couple of other factors would be | | | | into growth or equity funds and how much should |
| considered, such as whether the index's overall | | | | go into income-producing investments (and all of |
| trend is on the rise or is sinking. As well, it is | | | | the sub-classes in between), then index funds can |
| possible, however unlikely, than an investor | | | | certainly work. Without knowing the asset |
| performs exactly as the index would. So, the | | | | allocation however, it is most likely that a balanced |
| investor has a 50% chance of virtually | | | | fund will work best. |