What I Like About Fundamental Indexing
Sunday, February 28th, 2010
Russell Bailyn submits:
Some of you already know that I’m a big fan of indexes and low-cost investing. I’m still a fan of the occasional manager who consistently outperforms his / her benchmark but I’m still skeptical that it’s worth the added expense over a long period of time. This post is specifically about fundamental indexing.
For those of you out of the loop about fundamental indexing, it’s a strategy which equal-weights the stocks in an index instead of weighting the index holdings based on market capitalization. When you weight based on market cap the way major indexes such as the S&P 500 do, your index inevitably invests the majority of its money in the top holdings. For example, the 20 largest companies in the S&P 500 comprise just over 32% of the index. The other 480 stocks comprise just under 68% of the index. While these market-cap indexes may be more accurately reflecting the economy, they may not be helping your portfolio…
