Redwood: What can indices tell us?

If you pore over past performance figures, you will be told that long-term investment in shares works.

If, they say, you had bought and held shares for the last 30 years or more, you would have enjoyed good returns. That is what the indices tell you. What they often neglect to tell you is the index itself is changing constantly. It is itself a kind of investment manager, and a Darwinian one. The index throws out underperforming companies – or reduces their impact on the whole through the weightings it puts in. Over time there will be very large changes in the proportions in different companies, industries and sectors. If our mythical long-term investor just bought and held shares he li...