Buffett has a famous thesis: “If you stick to fixed investment index funds for a long time, an amateur investor who knows nothing can beat most professional investors.
But with so many index funds , how should we choose?
- Select the index.
- Broad base index VS narrow base index
The broad base constituent stocks cover a wide range of industries, including different themes in different industries, and there are many investment directions. Even if a “black swan” event occurs, it will not cause too much loss, and the risk is relatively small. Common broad bases include CSI 300, CSI 500, SSE 50, etc.
The narrow-base constituent stocks cover a narrow range of industries and are indices that focus on a single industry or single theme. The selection of a narrow base should be based on strong optimism about the industry or theme, and if you follow the hot theme and industry, you can seize the opportunity of rotation.
Through comprehensive comparison, it can be found that the broad base with wide coverage and relatively stable volatility is suitable for novice investors who are not sensitive to the market, while the narrow base has strong periodicity and greater volatility. It is more suitable for professional investors who have a certain judgment on the market and have a strong risk tolerance.
Of course, the combination of the two is also excellent.
- The “low valuation” index has better growth space
When choosing investment targets, you can also pay attention to the valuation level of the index. Generally speaking, a low-valued index has better room for growth.
Generally speaking, the price-earnings ratio (PE) can be used to judge the valuation level of an index. The price-earnings ratio is the profit forecast given by the market. For companies with higher profit growth rates, the P/E ratio will also be relatively higher. The P/E ratio for the index is the same. Generally speaking, the lower the price-earnings ratio, the easier the index is to be undervalued and the higher the future growth potential.
When judging whether the current price-earnings ratio is low, you can use the historical valuation percentile, that is, sort the historical price-earnings ratio from small to large to see what proportion of the current price-earnings ratio is. In general, the smaller the value, the lower the index valuation.
Ordinary investors can also use the index treasure function in the Tiantian Fund APP to query the latest valuations of various indices from low to high, which is convenient and practical.
- Fund selection
Once the index is determined, you can choose from a number of linked index funds. Please refer to the following aspects for the selection method:
- Compare tracking error and information rate
Index funds are divided into passive index and enhanced index. Because of their different investment strategies, the evaluation criteria are also different.
For passive exponentials, the smaller the tracking error, the better. The passive index type adopts an investment strategy that replicates the index. Fund managers rarely actively manage investments throughout the investment process . Its goal is not to beat the index, but to completely replicate the index. The smaller the tracking error, the better the investment fit between the fund and the index; on the contrary, the larger the tracking error, the greater the risk of deviating from the original intention of index investment.
For the enhanced index type, the fund manager adds the concept of active management on the basis of passive replication index through the organic combination of active investment and passive investment, and obtains excess returns through appropriate risks. The evaluation standard can be seen from the information ratio, which represents the excess return obtained by the unit’s active risk. Generally speaking, the larger the information ratio, the higher the excess return obtained by the unit of active risk, and the stronger the investment ability.
- Compare fund sizes
For example, the company’s ability to redeem large funds has been greatly tested. The larger the size of the ordinary index fund, the smaller the impact in the case of large-scale subscription and redemption
In addition, if the size of the fund falls below a certain standard for a period of time, it will also face the risk of liquidation. Generally speaking, funds under 200 million should be cautiously invested.
- Cheap is the last word
Currently, the lowest management fee can reach 0.15%, while the high management fee can reach 1%. Don’t underestimate such a gap. If it is a long-term investment, a slight cost gap will lead to a large gap in the final yield under the compound interest effect.
Generally speaking, the return of enhanced index funds is higher than the overall return of passive index funds, because more active operation elements of the fund manager are added. Of course, an enhanced index fund is also a good option if you think the expected return from an enhanced index fund will more than make up for its interest rate and risk.