The current mainstream idea that is getting a lot of press lately is that investors would be best off investing entirely in stock market indexes versus an actively managed portfolio of stocks or a mutual fund. I remember hearing about this continually in 2007 – after the stock markets had done quite well for a few years and it seemed easy to make a positive return. The years after 2007 were some pretty tough ones, especially for “index” investors. Many investors sold out at the bottom of the market due to the stress associated with significant losses. That year was followed by a few years where the press conveniently did not seem to be recommending index investing.

There is lots of evidence that points towards the advantages of index funds over a select stock portfolio or a mutual fund. The advantages include reduced fees, diversification and potentially better returns. However, a proper analysis of any decision should also include the disadvantages. In my opinion there are two disadvantages of owning an index through an Exchange Traded Fund (ETF). First and foremost is the fact that a stock market index is VOLATILE, often way more volatile than a well - diversified stock portfolio or mutual fund. After 15 years as a Financial Advisor it has been my experience that investors dislike volatility more than anything else. Typically investors react to negative volatility fearfully and sell their investments at the bottom of a volatile cycle. The second significant disadvantage to an index ETF is that it is typically owned by investors who are managing their investments themselves. People are emotional creatures and we are certainly emotional about our finances. Just as a doctor is instructed to not treat themselves or their loved ones because of the incapacitating nature of emotion, so too should some people not be solely responsible for their own investment decisions. It can be worthwhile to have a Financial Advisor with whom to discuss ideas.

The truth of the matter is that certain investment ideas come in and out of favor over time. I remember when Principal Protected Notes were all the rage and it was almost impossible to purchase certain investments without having a protected note wrapped around it. This is extremely uncommon today.

Over the long-term I have seen investors benefit from a well-diversified portfolio of value stocks (good companies trading at good prices) and high quality, short to medium term bonds that provide positive return and are less volatile than the stock market index. I continue to believe that this is the most beneficial approach for investors and it is the strategy I use when making recommendations for a client’s investment portfolio.

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