Why you should invest in index rather than stocks?

Getting an investment right is often a matter of luck, but most of the time, and resulting in an average of all investment decisions in the medium/long term, most of the time the return obtained is a matter of a well-planned investment strategy.

Investing in stocks, or their collective equivalents such as mutual funds, requires time, knowledge and dedication; at least so that we know with some guarantee what we are investing in, and whether we really have options to see a juicy return in the form of revaluations. But there is another option that, although it may give lower returns than some stocks in particular, offers a much safer return, at least 100% safe from bankruptcies or corporate extinctions. The option is to invest in indices.

Any investment decision requires a thorough analysis: if not, it is better to go to the indices
These Are The Reasons Why It May Be Preferable to Invest in Indices Rather Than Stocks 2
Statistically, for most people, it’s not usually good investment decisions to make when you use the heat of a bubble. Neither are those who simply have the money raising dust (and other people’s profits) in the bank account. And while it is true that each type of investor at each moment of his life has some needs for his savings, which must be translated into a different way of investing them, it is no less true that in the markets, the safest return is in the long term. Security is out of gold fevers that leave more and more victims than the new rich, and requires taking the time to analyze every balance sheet, every company, every market.

But not everyone has the time (or the will) to scrutinize every accounting entry of listed companies that are a potential investment destination. Something similar happens with investment funds that often also require in-depth analysis, at least to know if they are well managed and if their management style is adapted to our needs. Focusing on analyzing for that average investor, with no time or knowledge to analyze beyond a few minutes a day, we always have the indices there.

And how to invest in indices? Well, the truth is that to invest in an index as such, the best option is the quoted funds or ETFs that replicate them. This financial product, which revolutionised the investment market a few years ago, combines very low management fees, real-time trading such as shares, and dividends. Indeed, in addition to today’s topic, index ETFs are an exceptional formula for optimizing the profitability/effort+time equation.

In order for profitability to come to your statement of securities account, all that is needed is for the index to take the bullish path. On this last point in particular, which is the crux of the matter in the end, we can only recommend in general terms that you frequently read serious salmon halves like us, so that you can measure the pulse of the market at any time you need to make an investment decision.

Well, there is an empirical basis for this, but always under the previous premises of needing an investment formula that optimises this exchange of profitability/effort+time. Because obviously, a good investment in the shares that are most revalued in the market will always yield more returns. After all, indices are only a weighted average of the shares that make up the index, and mathematically there will always be stocks with a higher return than the index, but don’t forget: there will also be as many stocks with a much poorer return as the selective (and not selective) ones.

What is more, there will be stocks (and even whole companies) that will disappear from the face of the markets, resulting in a sinister balance sheet of 100% losses for the hardest-hit and most suffering investors. And that is precisely where we would like to focus on today’s issue: it is precisely by investing in indices that you are completely safe from this fateful (but not infrequent) event of corporate deaths.

And to return to the question that led to the last title: yes, there is an empirical basis for affirming that indices are the best neglected investment formula. The empirical basis requires a somewhat lengthy analysis of the life cycle of a selective index. And although we really need a senior index for the temporary sample to be somewhat rigorous, the results are going to be equally worthy of consideration.

The crises we are talking about may no longer be so fresh in popular memory, but I can assure you that both of them have been very dramatic for our socioeconomy (I hope you will at least keep the last one in mind). We are talking about that”.com” crisis that devastated the markets, and the most recent and terrible Spanish real estate crisis.

In the first of these debacles, the”.com” crisis, we must remember how there were prices related to technology that rose like a real rocket: Telefónica was the first of them, despite being a giant. But there were other protagonists in this disaster. Due to the size of our domestic selective, we can only speak of one of these”natos.com” players, unlike other markets such as the US and its large NASDAQ.

This”nato.com” star is Terra, the unsuccessful company that led the.com bubble in Spain, and which even surpassed ENDESA in terms of market capitalisation with hardly any assets and little more than a generic Internet portal. The company, once the flagship of the new economy, was de-listed in 2005 with a 98% drop from highs, and having volatilized the savings of countless small investors. However, the Ibex-35 is still there.

The other major crisis that the Ibex-35 has survived with revenues is the already”fresh” Spanish real estate crisis. Due to the generalization of the bubble within the Spanish economic reality, in addition to the always important relative weight that the construction sector has had in the economy of Spain S.A., in this case we have many more protagonists. The star of this bubble was the vibrant real estate bubble Astroc, overheated where they were, but that gave yields that seemed to be the result of a rocket that was never going to stop rising (like the price of flats). But it ended up going down (and how they did it!), just as some of us predicted.

Astroc’s travel companions were most (if not all) of the rest of the construction and real estate companies. After years of drought in the real estate market, there have been several victims. Disappearances, bankruptcies, mergers for survival have populated the sector of both listed and unlisted companies. Companies such as FCC, which was once a business example of management and profitability, have ended up impoverished and in a situation of weakness, which has taken them out of the selective market in one way or another.

We have analysed the national case of the Ibex-35 because we have to do so, but this temporary sample we spoke of earlier, in the case of our relative Ibex-35, does not meet the minimum standards of statistical rigour that some of us demand of ourselves: it is too young an index. In fact, as I was saying, the Ibex-35 as such saw the light back in 1992, which distances us from its creation for a mere 26 years.

This is really not much in relative terms when compared to longevity and business lifecycles, nor for the average return cycle for savings accumulated over a full working life. The point is that this comparison is so fair in timing that it does not allow for a more extensive comparison, so that cyclical and/or random market and economic events can be ruled out. And it is precisely today that we are dealing with the issue of investment in the long term, with a time horizon of a working life.

But the”truncated” sample of the Ibex-35 becomes revealing in other more senior selectives
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Fortunately, we have around us other indices with more history than ours, and which are listed in an economic system very similar to the European and Spanish ones. Indeed, I’m talking to you about Comrade Dow. The DWIJ, or Dow Jones Industrial Average, is a selective that was created at the end of the 19th century, more specifically in 1896. Apart from the fact that it is undeniable where the cradle of popular capitalism lies, it is interesting to analyse those 12 companies that were included in the index at its launch, and to know what has happened to them today.

Business Insider recently did this informative analysis exercise in this article. As you may have seen, and as expected, the economic and business reality shown by the analysis of the composition of the index smells like naphthalene. And it is entirely logical, since that original Dow reflects a socioeconomy of almost 125 years ago. This is indeed a truly historic composition. But let’s move on to today’s analysis, and see if it would have been more appropriate to invest in the index, or in stocks, in this sample period.

Hedge fund

A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.[1] It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets.[4][5]

The term “hedge fund” originated from the paired long and short positions that the first of these funds used to hedge market risk. Over time, the types and nature of the hedging concepts expanded, as did the different types of investment vehicles. Today, hedge funds engage in a diverse range of markets and strategies and employ a wide variety of financial instruments and risk management techniques.

Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds. However, following the financial crisis of 2007–2008, regulations were passed in the United States and Europe with intentions to increase government oversight of hedge funds and eliminate certain regulatory gaps.

Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial fraction of asset management, with assets now totaling around $3 trillion.

Hedge funds are almost always open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis). The value of an investor’s holding is directly related to the fund net asset value.

Many hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling (“absolute return”). Hedge fund managers often invest money of their own in the fund they manage.[10][11] A hedge fund typically pays its investment manager an annual management fee (for example 2% of the assets of the fund), and a performance fee (for example 20% of the increase in the fund’s net asset value during the year).[1] Both co-investment and performance fees serve to align the interests of managers with those of the investors in the fund. Some hedge funds have several billion dollars of assets under management (AUM)

Risk management
Investors in hedge funds are, in most countries, required to be qualified investors who are assumed to be aware of the investment risks, and accept these risks because of the potential returns relative to those risks. Fund managers may employ extensive risk management strategies in order to protect the fund and investors. According to the Financial Times, “big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management.” Hedge fund managers that hold a large number of investment positions for short durations are likely to have a particularly comprehensive risk management system in place, and it has become usual for funds to have independent risk officers who assess and manage risks but are not otherwise involved in trading. A variety of different measurement techniques and models are used to estimate risk according to the fund’s leverage, liquidity and investment strategy.Non-normality of returns, volatility clustering and trends are not always accounted for by conventional risk measurement methodologies and so in addition to value at risk and similar measurements, funds may use integrated measures such as drawdowns .

In addition to assessing the market-related risks that may arise from an investment, investors commonly employ operational due diligence to assess the risk that error or fraud at a hedge fund might result in loss to the investor. Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund’s ability to develop as a company.

Fees paid to hedge funds
Hedge fund management firms typically charge their funds both a management fee and a performance fee.

Management fees are calculated as a percentage of the fund’s net asset value and typically range from 1% to 4% per annum, with 2% being standard They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager’s profits. However, due to economies of scale the management fee from larger funds can generate a significant part of a manager’s profits, and as a result some fees have been criticized by some public pension funds, such as CalPERS, for being too high

The performance fee is typically 20% of the fund’s profits during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.Performance fees have been criticized by Warren Buffett, who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch.

Almost all hedge fund performance fees include a “high water mark” (or “loss carryforward provision”), which means that the performance fee only applies to net profits (i.e., profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempting to recover the losses over a number of years without performance fee.

Some performance fees include a “hurdle”, so that a fee is only paid on the fund’s performance in excess of a benchmark rate (e.g. LIBOR) or a fixed percentage. A “soft” hurdle means the performance fee is calculated on all the fund’s returns if the hurdle rate is cleared. A “hard” hurdle is calculated only on returns above the hurdle rate. A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.

Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year) or when withdrawals exceed a predetermined percentage of the original investment. The purpose of the fee is to discourage short-term investing, reduce turnover and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund.