I’m not a big fan of investing through index funds, as I made clear in my book Invest Like a Fox…Not Like a Hedgehog and in regular issues of Retirement Watch. Generally, I don’t like the way the indexes are constructed. They fail investors at the most important times. Most indexes are capitalization weighted, giving the largest positions to the stocks with the largest capitalizations or total values. The result is you’re buying more of a stock as it is rising and selling more as its price is declining. In most indexes, the total return is greatly influence by the 10 largest companies and you own more of the companies with the highest valuations and less of those that are selling cheaply.
Here’s another quick look at this view, looking at the NASDAQ 100 or QQQ. Five stocks make up over half the index, and they’ll all technology stocks.