Let me say at the outset that I am no stock trader and I am only an investor for the long term (over 1 year). After reviewing the results of the various market index funds (DOW Jones, S&P 500, NASDAQ, etc.) and seeing that the movement of each one mirrors the other, why wouldn't I just invest in one rather than a variety of them? Sure they may be slightly off of each other but basically the same general movement up or down. It doesn't seem that diversification is as important when investing in the overall market as it is when investing in a portfolio of individual stocks. Am I missing something here?
ETF Guy answered:
You make a valid point and I see little reason to invest in multiple TOTAL market funds. There are reasons to invest in multiple index funds that track different portions of the market such as large vs. mid vs. small. And of course, total market index funds are generally country specific so you'll need other index funds to capture international markets.
Bob answered:
You are basically correct. Invest in a single US stock index fund. If you invest enough, the fund may lower its expense charges. I like the Vanguard total stock market index fund: VTSAX. Then you can add some index funds for other countries (Europe or Emerging Markets) or perhaps in a specific sector (REIT or Energy, etc). If you buy alot of different stocks and are well diversified then it should act like a index fund for the overall market. Note that the nasdaq is heavy on tech companies so it typically goes up / down more than the S&P500 for example. The S&P 500 has something like 70% of the entire US stock market cap so it is a pretty good representation of the overall US stock market except for small cap companies.
L.G. answered:
Each investment company's index fund contains a different mix/percentage of the various types of stocks, which would affect how that fund reacts to the market's ups and downs. If an index fund was heavy in financial stocks, it would be more likely to tank right now.
Personally, I have Fidelity's OTC Index Fund and it has done quite well when compared to what the OTC itself is doing and how other OTC index funds have performed. It is not losing as much as some of the other OTC index funds and actually rises on some days when the OTC itself has tanked. So, you want to know how the index fund is weighted.
Space Invader101 answered:
No, you're absolutely right. For a long term investor who doesn't want to look at stocks every minute of the day like I do, I'd recommend buying about 5-10 blue chip dividend paying stocks in companies that profit year after year no matter what the market does to their price in the short-term. Coca Cola and Pfizer are good examples.
Alternatively a managed fund with large cap (blue chip) stocks would also be good. Not all stocks pay dividends.
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