Passive investing is simple and popular, but it’s not risk-free. Concentration in a few companies, distorted pricing, and liquidity risks are real concerns.
In some cases, they will have the same issues. Managers will need to rebalance the positions, and buy MSFT too because MSFT is a "quality stock", and I'm afraid the TOP 10 of the stocks will be very similar to those from S&P500)
For investors who choose index funds due to limited time for research or risk tolerance, what alternatives would you recommend that maintain the simplicity of passive investing while addressing these concentration and valuation risks? Are there specific strategies or fund types that could offer a middle ground?
A great question! I would recommend beginning with the core-satellite strategy in this case. If you have little time to study value investing or fundamental analysis, your satellite part should be small. As you increase your knowledge over time, this part might become bigger.
Thank you for the response and for introducing me to the core-satellite strategy - I hadn't encountered this concept before. As someone who practices dividend investing, I'm curious: would you consider quality dividend-paying stocks as a suitable satellite portion for investors moving beyond pure indexing? I'm researching the comparison between index funds and dividend investing approaches, and I'd be interested in your thoughts on how dividend strategies might fit into this framework.
Adding good quality companies that regularly pay and increase dividends might be a good addition to the core part. Like V or MSFT (but it’s expensive right now).
Thanks for the very interesting read. In this context, what is your opinion on "quality ETFs"?
In some cases, they will have the same issues. Managers will need to rebalance the positions, and buy MSFT too because MSFT is a "quality stock", and I'm afraid the TOP 10 of the stocks will be very similar to those from S&P500)
For investors who choose index funds due to limited time for research or risk tolerance, what alternatives would you recommend that maintain the simplicity of passive investing while addressing these concentration and valuation risks? Are there specific strategies or fund types that could offer a middle ground?
A great question! I would recommend beginning with the core-satellite strategy in this case. If you have little time to study value investing or fundamental analysis, your satellite part should be small. As you increase your knowledge over time, this part might become bigger.
Thank you for the response and for introducing me to the core-satellite strategy - I hadn't encountered this concept before. As someone who practices dividend investing, I'm curious: would you consider quality dividend-paying stocks as a suitable satellite portion for investors moving beyond pure indexing? I'm researching the comparison between index funds and dividend investing approaches, and I'd be interested in your thoughts on how dividend strategies might fit into this framework.
Adding good quality companies that regularly pay and increase dividends might be a good addition to the core part. Like V or MSFT (but it’s expensive right now).