 Hey everyone, welcome to another video lesson from navigation trading in this lesson I want to talk to you about why I think that Index funds are extremely dangerous right now and for the purpose of this lesson. I want to focus on the S&P 500 index It's one of the most widely known indexes in the world now What is the S&P 500? It's made up of 500 of the largest US companies It's weighted by market cap So the size of the company within the index and the companies are actually chosen via a committee That votes on whether or not a company will be inducted into the S&P 500 Now index funds have gained a ton of notoriety a ton of publicity and a ton of popularity in the last decade or so Partly because they are low cost people are starting to realize that these so-called professional money managers or actively managed funds Very rarely even beat the performance of the S&P 500 So the amount of money invested in index funds is Astronomical compared to what it was just 10 years ago the attraction as I mentioned is the low cost and being able to be in what people think is a diversified broad market index and it's a way of they think just passively investing so they're just putting money in these funds using advisors investing in their 401ks and just piling money Huge amounts of money into these index funds and I want to talk to you about why I think this is a very very dangerous Proposition for retail investors to start with the investors who invest in index funds I don't think have any idea of what they're really investing in in their mind. They're thinking they're diversified They're in a broad market index. They're just gonna track the overall market and and they're very diversified Here's the problem take a look at this and this is as of the end of the second quarter in 2018 so ending June 28th 2018 Amazon had accounted for 36% of the S&P 500 return year to date in 2018 If we look at the top four Amazon Apple Microsoft and Netflix, they're responsible for 84% of the S&P 500 upside in 2018 if you take a look at the graph in the bottom right hand column It adds a few more names to show you that of these 10 stocks It's contributed to a hundred twenty two percent of the returns of the S&P 500 So take a look at these different names Amazon Microsoft Apple Netflix Facebook Google Then we've got MasterCard and Visa which I will exclude from this But then Adobe and Nvidia make up the top 10. Well, what's similar about these eight funds? Well, they're all technology companies, right? So when you invest in the S&P 500 are you really investing in a broad market index or is this really a technology fund? Now there's nothing to say that technology isn't going to continue to lead the market as far as returns go But I would be really careful about that because there's so much technology in the S&P 500 That if things turn around in technology the entire market could go down significantly and with the popularity of index funds and ETFs low-cost index funds So many people are investing in these and the actual Makeup of these indexes is really just a handful of technology stocks Now if you understand that and you're okay with it and that's really what you want to be invested in then All power to you go ahead and invest in your index fund But I think very very few people understand what their S&P 500 index fund is actually made up of One of the reasons this makes me really nervous for those invested in index funds is take a look at the top five capitalization stocks by waiting back in June 30th of 2009 so about ten years ago Look at this Microsoft was the only company in the top five from ten years ago All the other top five companies have completely changed and if we were to look at the top five companies ten years prior to that So 1999 what you would see is it's a completely different list a totally different list of top five companies in the S&P 500 And if you can remember back to 2009 if you were investing at that time You know you thought ExxonMobil was this world beater, you know too large to fail and not that they've failed But they're definitely not anywhere in the top five at this point, you know Microsoft has hung in there Procter and Gamble Johnson & Johnson AT&T all of these huge massive companies that you almost thought at that point would always be there And I think we have the same feeling today is that you know if you look at Apple, they're just dominating their space Microsoft continues to be a big player Amazon in the retail online marketplace I mean they're just dominating not to even take away from their data industry and then alphabet Which is Google dominating the online search and advertising in Facebook in their respective category as well We look at these companies and we think these companies are just gonna go on forever They're gonna dominate the marketplace forever, but the reality is is that there are always disruptors There are always changes in the economy. There are changes in law There are changes in what people want and there are gonna be companies that come up and disrupt this top five 10 years from now and the reality is not only are these index funds heavily weighted in these categories But because these are the top Liquid stocks available almost every hedge fund out there is invested in these top names Every actively managed mutual fund hedge fund index fund are now completely loaded with this handful of Technology names because that's where the liquidity is. So the bottom line is this I'm not calling for a market top I'm not saying that we're gonna crash tomorrow But what I'm saying is I don't want you to blindly invest in index funds Because I don't feel like they're this broad market safe diversified portfolio that most people think they are Second take control of your account be strategic with your investments at navigation trading We are all about using probabilities and statistics to be strategic with our trading. We're not just blindly following any guru We're not just blindly following any index fund You have to be strategic with your money and lastly I talk about this all the time and that is don't follow the herd If everybody else is doing it I'm inclined to go the opposite direction and I think that you should too Anytime you have this massive consolidation in just a handful of stocks and just a handful of names and Everybody is just buying buying buying them The reality is of a capitalistic market is once it gets to a point that there's no more buyers in that area and Something happens and it turns down to the downside Guess what those buyers those buyers that continue to push this thing higher are the ones that always get hurt when the market reverses So again be strategic with your investments join us at navigation trading where we are Strategic with our trades and we can make money whether the market goes up Down or sideways because it's not going to go up forever And you don't want to be one of the ones caught at the top when this thing does turn Happy trading. We'll see you on the inside