Question

What are the arguments for and against an index fund?

Are these arguments stronger or weaker for funds investing in large-cap U.S. stocks, small-cap U.S. stocks, and foreign stocks?

Answer 1

Argument in favour of index fund :

It is relatively safe than investing in individual stock. Individual stock are subject to manipulation however index fund can't be manipulated

Argument against index fund:

1) lack of downside protection : Investing in index fund will give you profit when market is doing well but will leave you vulnerable to the downside. Downside could be hedge using put option or shorting index, but it will defeat purpose of investing
2) Lack of reactive ability : Individual stock can sometime become overvalued or undervalued providing investor chance to enter or exist while index does'nt gives such opportunity
3) No control on holding : Individual can't change the holding of stock that made the index, even if investor believes that particular stock will out perform , it can be added to index fund
4) Dampened Personal Satisfaction : investing in index fund don't give much return companred to investing in stock

These arguments are weaker for funds investing in large-cap U.S. stocks, small-cap U.S. stocks, and foreign stocks