A reason why index funds that track things like the S&P 500 have become popular in recent years is that each investor is shielded from seeing the volatility of individual components that can promote irrational selling. If someone owned Visa and Chevron outright over the past year, he might discount the excellent performance of Visa and fret over the fluctuation in Chevron that took the price of the stock from over $130 to under $70 at some point in the past few months. And yet, if someone owned an S&P 500 that contained Chevron, they would never actually see the Chevron stock individually swing in stock price because its performance would get blended in with hundreds of other companies. It’s all irrational, yet Dalbar studies show that the typical investor churns over individual stocks at almost triple the rate of S&P 500 index funds.
There are circumstances, however, when it … Read the rest of this article!