I’ve had a lot of recommendations concerning Index Funds as of late. It seems that many people believe that they are the way to go.
I happen to disagree, especially with current market trends.
An Index fund is a business that buys shares in some (weighted funds) or all of the companies listed on the stock market. As a result, the value of your investment goes up and down in relative sync with the stock market itself. These have become famous in recent years as Warren Buffett and others began recommending them for folks who don’t know much about the stock market.
I have a big bone to pick with them, however. When you purchase shares in an Index fund, you don’t own a piece of the individual companies. Instead, you own a piece of a company (or fund, whatever you want to call it) that happens to own pieces of individual companies. You don’t actually own a bit of the individual companies themselves.
I prefer to cut out the middle man because I’m ornery like that. Why pay someone else big bucks so they can buy and benefit from the stocks? If I wanted to go that route, I’d simply start collecting shares on my own (which I might do someday).
My primary concern at the moment isn’t quite that nitpicky, however. My concern is with the fact that the stock market seems to be on the verge of a bear market. As a result, the value of Index Funds could drop dramatically. It’s gotten to the point that Vanguard no longer allows its employees to invest in their own product, the S&P 500 Index Fund.
When a cook refuses to eat their own cooking you need to run for the hills because something is seriously wrong.
I believe I know what it is. Here is a screenshot of the S&P 500 Index:
See that slow, downwards trend? That’s the value of an S&P 500 Index Fund starting to go down around mid-January of this year.
Here’s another one:
This is the Dow Jones Industrial Average. It’s been trending downwards as well this year. Like the S&P 500, the trend is gradual, but it’s still there. In fact, the only major one still trending upwards this year is the Nasdaq:
The Nasdaq is very tech-oriented, so its gains are doubtless tied to the FANG stocks (Facebook, Amazon, Netflix, and Google). I suspect that upwards trend is about to change. Look at this:
This is a long-term view of Amazon’s stock rise. See how steep the trend is? If there is one thing I’ve learned during my research, the steeper the trend, the less sustainable it is. Amazon is the darling of the stock market but you can bet your buttons it won’t be able to sustain that momentum forever. It will tank, and tank hard. The only question is when. If you look very closely at the chart (just click on the image to see it full-size), you can see that the top is already beginning to round out. This may very well signal that the price is about to drop, though it is a bit too early to tell at this point.
I read somewhere (I really wish I had saved the link), that it is the FANG stocks currently supporting the stock market averages. Facebook, Amazon, Netflix, Google (now called Alphabet), and by extension Apple, Microsoft, and Intel are providing around 85% of current gains on the stock market. As a whole, over 60% of the stock market is down, so when the FANG stocks plunge, those invested in Index funds will see their nest eggs wiped out.
The worst part is, that plunge is already starting. Here is a screenshot from Facebook’s stock:
See that big drop, like the stock fell off of a cliff? It will take them months, if not years, to recover. I suspect that the price of the stock will fall even lower before it’s done since they usually do.
Here is Netflix:
Netflix is on its own roller coaster ride downwards.
Google (Alphabet) is the only one of the primary FANG stocks that seems to be in a stable trend upwards:
So out of the four primary stocks fueling market gains, only one of them seems to have the ability to continue to move upwards for the long term.
In addition to this, as I look through what I call the “bargain bin” I am noticing that many of the stocks there began a major downtrend in January, coinciding with the start of the downward S&P 500 trend that’s starting to appear. My guess is that these companies are the “canaries in the mineshaft”–more sensitive to change than the overall market. I’m seeing stocks that traded for $5, $10, or more a share prior to that time taking a sudden drop–and staying down despite the fact that nothing within the company has really changed.
I may be far from an expert but to me the warning signs are significant enough to pay attention. We may not be in what is called a Bear Market right now (I don’t even think they are calling it a correction yet) but I highly suspect that one is coming. Those who are heavily invested in high-flying stocks like the FANG group or so-called “safe” Index Funds will be hurt the most if I’m correct. Vanguard has apparently seen the writing on the wall but since they will make money on their Index Funds regardless of how well (or poorly) they do, they will continue to market them to the unsuspecting general public as they protect their employees by not allowing them to invest in it.
In conclusion, as a result of my research, my answer is a firm no. No, I will not invest in Index Funds at this time. If Vanguard doesn’t even recommend for its own employees to invest in their product, I refuse to touch it with a ten-foot pole.
I hope you understand my reasoning now. This is why I firmly believe that my best bet is to scrounge around the “bargain bin” for companies already suffering from the downtrend. For the record, all of this could very well blow over–if it does and my concerns are eased, I will consider the investment.
For Further Reading:
Top Economist: Get Ready for a Stock Market Drop
Why the 1929 Stock Crash Could Happen in 2018
‘A storm is brewing’ in the US economy, says economist Diane Swonk