Why Index Funds Are a Mistake (Especially During a Market Crash)

Over the past 10 years, the world has gone hog wild for index funds. That’s fine as long as they continue to make new highs.

And, while I am bullish on stocks going forward, I think the sudden, sharp downturn illustrates the dark side of relying on index investing.

So, today let’s look at some index-fund basics, and I’ll make my case for how investors can really maximize their profits going forward.

Index funds are investment funds that track a specific market index, like the Dow Jones Industrials or the S&P 500.

Index funds don’t try to beat the market. They are the market. They mindlessly buy and sell whatever stocks are in an index.

Index funds are incredibly easy to buy. They charge low management fees. And for some folks, they are a good option.

But if you’re willing to do just a little work and a little extra thinking each year (or let me do it for you), index funds are actually the wrong choice for your portfolio.

You may not know this, but way back when I was in grad school at Cal State Hayward, I was taught that we should all invest in indexes. After all, the stock market was supposed to be efficient and impossible to beat.

However, while working on a college project, I discovered that this couldn’t be further from the truth.

You see, I was given access to one of Wells Fargo’s mainframe computers and assigned a project on how to build a tracking portfolio that tracked the S&P 500. Through a bunch of number crunching, I figured out that I needed 322 stocks to mirror the S&P 500.

Unfortunately, I failed the assignment and actually beat the S&P 500! From this, it became clear to me that indexing was not efficient.

The reality is that the real money will be made in individual stocks. And if you focus on owning only the best stocks the market has to offer – particularly high-quality small-caps like the Breakthrough Stocks I recommend – you can CRUSH the returns people earn in index funds!

That’s the goal of Breakthrough Stocks, in a nutshell: massively accelerating your portfolio’s growth and drastically reducing the time it takes for you to retire.

On Wednesday, I revealed the philosophy I follow to find those stocks in my Breakthrough Stocks Summit. The event was completely free – as is the recording. It includes an invitation to join Breakthrough Stocks at a $1,500 discount…but now, four days after the event, my publisher is saying that the discount expires tonight at midnight!

Click here to watch me reveal the strategy and my #1 Breakthrough Stock now. I’m proud of how well it’s held up in this market downturn – in fact, it gained more than 20% this week! – yet most folks have never heard of it.

That’s because of the dirty little secret of the index fund industry: When you buy index funds, a lot of your money gets invested in the crappy companies.

You see, when we talk about the Dow Industrials or the S&P 500, it’s important to remember that they don’t exist to show you what the best companies are. They exist to represent the market as a whole.

That’s why – and the index fund companies will NEVER tell you this – their index funds contain a lot of lousy stocks.

It’s a simple matter of numbers, really. For example, the widely followed S&P 500 index owns 500 stocks. Sorry, corporate America, but not everybody can be at the top. There simply aren’t 500 really great companies out there. Exceptional stocks that are worth your time and money are few and far between.

Macy’s (M), the big department-store retailer, is in the S&P 500…however, its financial performance over the past three years is a disaster. Amazon (AMZN) is eating its lunch. Other retailers are, too. And Macy’s stock is down 61% over the past three years:

I wouldn’t touch the stock with a 10-foot pole. But do you think the index-fund providers care about Macy’s business? No way. They just want your money, in the form of fund expense fees, in order to provide the shares. All they have to do in return is mindlessly buy stocks like these because they’re in the index!

Or take General Electric (GE), another corporate disaster.

GE’s business used to be all about making real things, like aircraft engines and refrigerators. But about 10 years ago, GE got into a lot of shaky lending and insurance businesses. The company lost a fortune in those businesses and GE became a disaster. The stock dropped 70% in a year!

But do you think the index funds care about GE’s business fundamentals or stock performance? No way. While GE was imploding, index funds kept mindlessly buying its stock because it was in the index!

As you read this, the popular S&P 500 index has dozens of horror stories like Macy’s and GE in it. They’re especially vulnerable because they don’t have the sales growth, earnings growth (and other business fundamentals), nor the interest on Wall Street, to sustain shares going forward. This is why it’s especially crucial to focus on high-quality stocks now.

And this is why when you buy an index fund, you essentially chain your portfolio to a bunch of basket cases and corpses.

That’s not a great way to build great wealth. That’s not what succeeding in America is about.

The bottom line is that, as much as I like small-cap stocks as growth plays, I don’t mean for you to rush out and buy the Russell 2,000 index. (Or the S&P 500 and Dow large-caps.) Instead, I recommend you build real wealth in the markets the best way I know how:

My system analyzes roughly 5,000 stocks, grades them according to eight specific fundamental factors, and waits for the right signal – a high Quantitative Score – to time the buy.

Click here to watch my Breakthrough Stocks Summit, because it’s one of the rare times I publicly reveal what my Quantitative Score measures.

In return for your time, you’ll get my #1 Breakthrough Stock pick now, and a $1,500 discount (that expires tonight!) to join us at Breakthrough Stocks going forward. I hate for anyone to be left behind, wondering, wishing and hoping, in a market like this. So I hope you’ll at least consider it.

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