Why Index Funds Can’t Beat the Market

Over the past 10 years, the world has gone hog wild for index funds. That’s fine as long as they continue to make new highs.

an LED display of stock tickers has big white letters spelling "Index Funds"
Source: Shutterstock

And, while I am bullish on stocks going forward, I think sudden, sharp downturns illustrate the dark side of relying on index investing.

So, today let’s look at some index-fund basics, and I’ll make my case for how investors can really maximize their profits going forward.

Index funds are investment funds that track a specific market index, like the Dow Jones Industrials or the S&P 500.

Index funds don’t try to beat the market. They are the market. They mindlessly buy and sell whatever stocks are in an index.

Index funds are incredibly easy to buy. They charge low management fees. And for some folks, they are a good option.

But if you’re willing to do just a little work and a little extra thinking each year (or let me do it for you), index funds are actually the wrong choice for your portfolio.

You may not know this, but way back when I was in grad school at Cal State Hayward, I was taught that we should all invest in indexes. After all, the stock market was supposed to be efficient and impossible to beat.

However, while working on a college project, I discovered that this couldn’t be further from the truth.

You see, I was given access to one of Wells Fargo’s mainframe computers and assigned a project on how to build a tracking portfolio that tracked the S&P 500. Through a bunch of number crunching, I figured out that I needed 322 stocks to mirror the S&P 500.

Unfortunately, I failed the assignment and actually beat the S&P 500! From this, it became clear to me that indexing was not efficient.

The reality is that the real money will be made in individual stocks. And if you focus on owning only the best stocks the market has to offer — particularly high-quality small-caps like the Breakthrough Stocks I recommend — you can CRUSH the returns people earn in index funds!

That’s the goal of Breakthrough Stocks, in a nutshell: massively accelerating your portfolio’s growth and drastically reducing the time it takes for you to retire.

On Wednesday, I revealed the philosophy I follow to find those stocks in my Moneyball Multiplier Challenge. The event was completely free — as is the recording.

Click here to watch me reveal the strategy and I’ll be releasing a new buy in next Friday’s subscriber-only Breakthrough Stocks Monthly Issue … so, now’s the perfect time to watch today’s interview on the system and get started with Breakthrough Stocks.

In case you haven’t seen it yet, the goal of my Moneyball system is to close in on these eventual winners by analyzing 8 key metrics. This allows smart folks to learn how to get positioned months or even years before the mainstream media finally catches on.

Even in a market downturn, these stocks tend to hold up better than any index.

That’s because of the dirty little secret of the index fund industry: When you buy index funds, a lot of your money gets invested in the crappy companies.

You see, when we talk about the Dow Industrials or the S&P 500, it’s important to remember that they don’t exist to show you what the best companies are. They exist to represent the market as a whole.

That’s why – and the index fund companies will NEVER tell you this – their index funds contain a lot of lousy stocks.

It’s a simple matter of numbers, really. For example, the widely followed S&P 500 index owns 500 stocks. Sorry, corporate America, but not everybody can be at the top. There simply aren’t 500 really great companies out there. Exceptional stocks that are worth your time and money are few and far between.

Macy’s (NYSE:M), the big department-store retailer, is in the S&P 500…however, its financial performance over the past three years is a disaster. Amazon (NASDAQ:AMZN) is eating its lunch. Other retailers are, too. And Macy’s stock is down 72% over the past three years:

I wouldn’t touch the stock with a 10-foot pole. But do you think the index-fund providers care about Macy’s business? No way. They just want your money, in the form of fund expensive fees, in order to provide the shares. All they have to do in return is mindlessly buy stocks like these because they’re in the index!

Or take General Electric (NYSE:GE), another corporate disaster.

GE’s business used to be all about making real things, like aircraft engines and refrigerators. But about 10 years ago, GE got into a lot of shaky lending and insurance businesses. The company lost a fortune in those businesses and GE became a disaster. The stock dropped 70% in a year!

But do you think the index funds care about GE’s business fundamentals or stock performance? No way. While GE was imploding, index funds kept mindlessly buying its stock because it was in the index!

As you read this, the popular S&P 500 index has dozens of horror stories like Macy’s and GE in it. They’re especially vulnerable because they don’t have the sales growth, earnings growth (and other business fundamentals), nor the interest on Wall Street, to sustain shares going forward. This is why it’s especially crucial to focus on high-quality stocks now.

And this is why when you buy an index fund, you essentially chain your portfolio to a bunch of dead weight.

That’s not a great way to build great wealth.

The bottom line is that, as much as I like small-cap stocks as growth plays, I don’t mean for you to rush out and buy the Russell 2,000 index. (Or the S&P 500 and Dow large caps.) Instead, I recommend you build real wealth in the markets the best way I know how:

My system analyzes roughly 5,000 stocks, grades them according to eight specific fundamental factors, and waits for the right signal and time to buy.

Click here to watch my Moneyball Multiplier Challenge, because it’s one of the rare times I’ll actually talk more in-depth about the importance of fundamentals during my interview. (That’s something I rarely do outside of my paid services!)

You can watch the recording of Wednesday’s Moneyball Multiplier Challenge to find out all the details of my “Moneyball” system. And, if you choose to join me at Breakthrough Stocks after, you’ll receive my exclusive special report, My Top 3 High-Flying Moneyball Stocks Poised to Skyrocket by 1,000% or More at no extra cost.

In this report, I recommend three fundamentally superior small-cap stocks flying under the radar in today’s hottest sectors.  For example, one is a player in the 5G wireless technology sector that’s undergoing rapid adoption in the U.S. and across the world. This company achieved the highest level of revenue in its history during the third quarter and is in prime position to tap into the growing demand for highspeed internet with so many folks working from home.

It also holds a rare AAA-rating, which means it earns an “A” for its Fundamental Grade, Quantitative Grade and Total Grade. Get the full details, here.

Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Amazon, Inc. (AMZN)

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/why-index-funds-cant-beat-the-market/.

©2021 InvestorPlace Media, LLC