Index based investing. Is average. Is good

An index is a measurement of the value of a group of items. Perhaps the best-known index in Australia is the Consumer Price Index, or CPI. The CPI is a measurement of the cost of living with reference to the prices of a basket of goods and services. Similarly, a share index measures the value of a group of shares. The All Ordinaries Index is probably our best-known index. It tracks the value of the 500 largest companies listed on the ASX.

An Index-based investor invests in a fund which tracks an index. Investing in an index fund is known as a passive investment strategy as there is no exercise of skill or judgement in deciding which shares to buy. All the shares in the relevant index are bought in proportion to their weighting in the index. For example, Vanguard Australian shares index fund tracks the ASX 300 index, which means it invests in the largest 290 to 300 companies in Australia. However, due to the existence of just a few large companies in Australia which dwarf the rest, the top 10 holdings represent just over 50% of the total fund.

What are the advantages of index based investing?

• Cost
• Simplicity
• Lower risk
• Good performance