Don't Drown in the Index Pool

Do you have to sell that S&P index fund? Are you in danger of losing a ton of money if you stick with it? Would you do better if you stopped putting money into it and instead tried to mimic the Nasdaq?

Yes, yes and yes.

Sorry to be so noncryptic, but I don't see the S&P turning around anytime soon. Index funds had been the way of the world for so long that it is hard for many people to believe that they have any risk.

Wrong!

These funds have a ton of risk. In fact, they represent an index that became progressively overvalued year after year because of the self-fulfilling prophecy of indexing's own success. People began to simply check off S&P 500 for their 401(k) plans, and indexing became the de facto way to buy stocks.

Last year, we saw the beginning of a trend away from indexing, as active portfolio managers started beating the indices and the S&P started languishing. Lately I have been struck by the tax efficiencies and convenience of unit trusts as a better way to invest for the long term.

Rather than just knee-jerkily putting more and more money into an index that no longer represents the best and the brightest, how about examining some of these Merrill Lynch HOLDRs that Dagen McDowell has written so eloquently about. I know if there were a HOLDR for the Red Hots, I would be much more interested in buying that unit trust than I would buying more S&P 500 exposure.

Check those out before you blindly send those additional funds into an index pool. They may represent a better deal.