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Financial Planning / Foolish 401(k)s


Subject:  Re: index funds in a 401K Date:  4/1/2000  1:14 PM
Author:  W401K Number:  7233 of 26295

I agree somewhat with you. Index funds have their place in an investment portfolio, but should not comprise the entire portfolio, and not just for tax efficeincy reasons. The S&P 500 Index funds should be treated as a large cap growth fund when you come down to it. Since the Index is cap weighted, meaning if you invested $500 dollars in the index, you would buy $1 of each company. You dollars would be directed toward the largest companies with the largest capitalization (total outstanding shares x current share price). So the largest company would get more of your dollars then the 2nd largest and so on. Because of this cap weighted function. It is possible for the lower 400 stocks to rise and still lose money if the largest one hundred do not go up.
This will typically be true when small caps start outperforming large caps. The past few years have seen large caps do well which is why everyone is favoring indexing. It has worked well the past 5 or 6 years. Actively managed funds do have their place. As do different asset allocation models such as international, growth, value, small cap etc.

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