In this radio interview with Business Edge, David Alder discusses why index based investing can be a dangerous approach in the Australian share market and super funds with high exposure to an index investment style are taking much higher risks than they realise.
Investing in funds that mirror large international indexes has its place, but Australia is a different proposition. The ASX200 comprises 30% of banks and 20% resources – each of these sectors is highly cyclical and share prices have the potential to be very volatile. Furthermore, the top 20 companies in the ASX200, including Wesfarmers, Woolworths and Telstra, make up 57% of the index. The risk here is the true lack of diversification both at the individual company and industry sector levels.