This week, I’m talking about how to avoid the hidden danger of index funds. And before I get into all the buyer beware fine print that you need to know, I need to spend just a little more time talking about what’s great about index funds, lest you think that I’m some index fund hater, which is entirely possible if you listen to the rest of the tips this week after today. 

First of all, here at our independent advisory firm, True North Retirement Advisors, we manage about $260 million in client assets. And a sizeable portion of that is invested in index funds. I really like index funds and I think they are a great fit for most investors. And here’s why: 

It’s a cheap way to build a diversified portfolio. Just as an example, it’s hard to beat the fact that I can build a diversified bond ladder for a client with less than a quarter of 1% in annual fees, that provides about the same yield with significantly reduced risk compared to buying individual bonds.

The same can be said for using index funds to invest in the stock market - lower fees compared to most mutual funds, and less risk compared to individual stocks. It’s a win overall. 

But, I think too many people take the Dave Ramsey over-simplified investment advice of “just buy a good growth stock mutual fund”. I generally like Dave Ramsey a lot, but this is pretty garbage advice that can get people into a lot of trouble, as I’ll explain tomorrow. 

So rather than building a diversified portfolio of several index funds with exposure to different asset classes, many investors just buy the S&P 500 index fund, or some other broad-based index fund and call it good. They think their diversified because they own 500, or 1000, or 3000 different stocks with their “diversified” index fund, but the vast majority of index funds are market-weight index funds, and therein lies the problem...which I’ll get into tomorrow. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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