Dr. Ndubuisi 'Andy' Egwim (founder of moneywidedoctor.com, former NHS GP, 21+ years investor) explains how to choose index funds. He frames the decision around three personal factors—financial goals, risk tolerance, and capacity for loss—then compares index options by geographic diversification (FTSE 100, S&P 500, FTSE All-World) and previews technical considerations.
What index funds should you buy? What index fund should I buy? Basically, you've heard your favorite YouTube finance guy or girl say, oh, just buy index funds or ETFs and allow it to cook. But when you get into that app, you're confused because there are multiple index funds and you see even the one you want to buy, you say, oh, I want to buy S&P 500 or FTSE All World Index. You get there and you can't even tell because there are many options. I'm going to tell you, but before I do that, I'm Dr. Andy Gwim, I'm the founder of moneywidedoctor.com I'm a former salaried NHS GP and I've been an investor for 21 plus years. And investing entrepreneurship helped me hit my financial independence three years ago, allowing me to leave my salary job. So let's just jump into it. How do you decide again? Number one, it depends on your goals, your financial goals. Why are you investing for investing for your retirement? Are you investing long term for any goal in particular? Two, what's your risk tolerance? How much risk are you able to take and still sleep at night without worrying? And number three, what's your capacity to be a loss? If your funds went down by 50%, will you be too worried? So what's your attitude to what we call volatility? That's the starting point. But now let's move on to how to decide. Now there are three things to think about from first principles. The main reason most people go for a broad, well diversified index fund instead of individual stocks is because they want to diversify. That's the first thing you have to think about. Now when you think about diversification, you have to think, how far do I want to diversify? I'll give you an example. If you decide to go and buy like FTSE 100 as an index, you go in, you search in your platform, you find FTSE 100. That represents the top 100 companies in London Stock Exchange by size. But that give you diversification across countries. It just means you're limited to one geographical area. Also companies in the top 100 in London stock Exchange are probably not a good representation of, you know, the rest of the market in the world. That means you're going to be missing out big companies like Google, Apple, Nvidia, basically like the tech giants are not in London. So that means just buying the 5300 hasn't given you that diversification that you might be looking for. Now the second option is you might think, oh, maybe I'll just go for a broad, well followed, well tracked index fund like S&P 500, which has done quite well for several years. And you've seen my articles in the past, if you've seen them, that, okay, actively managed funds actually failed to be the S&P 500 for many years. So they passively managed S&P 500, which also represents the top 500 companies in the U.S. but the problem with the S&P 500 is that it's limited in geography. That means you're putting all your chips in one country. I know it's a big country, America. Actually, I think the stock market in America probably represents about 40 to 50% of the stock market. But then you're missing out the other 50, 50%. But then you might want to go global. So you look at FTSE All World Index. So Footsie All World Index will then incorporate developed economies, emerging economies. So that way you're diversifying a bit more. But here's the truth. At the end of the day, irrespective of what you decide to choose, you still need to know some basic technicalities.
