Index Investing And Housing Market Show Mixed Results

Index fund investing has become very popular in the past few years as investors love their low fees and hate how most fund managers underperform the market. There is a huge incentive for fund managers to spread negative information on index funds. We believe indexes are the best way to invest if you don’t have the inclination to do in-depth research. If you are reading this, you probably do invest on your own, but you can still tell your friends about the positives of index funds.

The biggest misleading information about index funds is that a high percentage of stocks in the Russell 3000 are losing money. Since the standard PE multiple calculations ignores the money losers, those against index funds and the bears say you need to be wary of them. The same has been said about the Russell 2000. The stat shared is that about 25% of Russell 3000 firms don’t make money. If someone is considering investing in the Russell 3000, they might get scared out of it especially because the percentage of money losers has increased over time. Investing in firms that lose money can be very risky and the fact that their percentage has gone up implies the index is overvalued.

The reality is that most of these firms that don’t make money are small biotech stocks. The smallest stocks have the least impact on the index which means investors who own the index have little exposure to these money losers. It’s highly unlikely these firms will impact the overall index meaningfully unless they become profitable, defeating the worry. The money losers represent 7% of the market weight by trailing earnings and 1% by next 12 month earnings.  

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