Indexing refers to an investment strategy where you buy a basket of shares all at once using one product and the advantages of this are the extremely low investment costs and the simplicity of the product. Typically these products track an underlying index which tracks certain shares. E.g. The Top 40 index tracks the biggest 40 companies by market share on the Johannesburg Stock Exchange.
Indexing makes sense for the average investor who is not interested in following the markets closely but wants some skin in the game. There are many service providers out there like Sygnia who can help you track the average market returns without having to be a stock market wizard.
I was reading Jack Bogle’s Little Book on Common Sense Investing when I came across the following quote from Jonathan Davis, a columnist for London’s The Spectator:
“Nothing highlights better the continuing gap between rhetoric and substance in British financial services than the failure of providers here to emulate Jack Bogle’s index fund success in the United States.
Every professional in the City knows that index funds should be core building blocks in any long-term investor’s portfolio. Since 1976, the Vanguard index fund has produced a compound annual return of 12 percent, better than three quarters of its peer group.
Yet even 30 years on, ignorance and professional omerta still stand in the way of more investors enjoying the fruits of this unsung hero of the investment world.”
“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
– Warren Buffett, 1993 Berkshire Hathaway Shareholder Letter
1993 Berkshire Hathaway Shareholder Letter