Index funds have eased much of the decision-making process of investing, except when it comes to selecting your strategy.
When financial advisor Tim Courtney evaluated a prospective client's portfolio last year, he found the entire savings was placed in a myriad of different index funds. A good sign — had they not all tracked the same large U.S. company indexes.
If an economic headwind came blowing through large-cap stocks, the client's entire portfolio would suffer, because each investment would "behave very similarly," said Courtney, who is CIO of Exencial Wealth Advisors.
Courtney's client sought the comfort of index funds but failed to realize that by investing entirely in U.S. large-cap companies, she inherently made a call on the market: that the only safe haven was in large American stocks.
As investors flood index funds with new investments, they're taught that it's the passive strategy that will perform long-term. And it's true; passive index funds outperform most active managers over a 10-year period. But that doesn't mean you're not making investing decisions.
When you first pick your funds, you're making a call on the market or having your internal biases play a role in the index you choose. This leaves you susceptible to common oversights.