What is an Index Fund?
An index fund is a passively managed
investing strategy that is set up to match the performance of an index. For
example, an investment firm can purchase the same stocks in the S&P500 and
closely match the performance. Most investors invest in stock index funds, but
they can also invest in currency or bond index funds as well.
Benefits of Index Funds
There are several benefits to investing in
index funds over individual stocks or other funds. Here are a couple of
advantages you should consider:
·
You don’t have to spend a
considerable amount of time and energy managing a portfolio.
·
You will not have ridiculous
fees to pay a pretentious money manager.
·
You can keep a very
well-diversified portfolio without having to purchase a considerable amount of
securities.
·
You don’t have to pay excessive
capital gains taxes by buying and selling securities on a regular basis.
Beat the Market Average By Matching it?
Most stock market investors want to beat
the market average. That is an ambitious goal, but very few are able to do so.
The Efficient Market Hypothesis states that it is impossible to outperform the
market average over the long-term. Warren Buffet and some other legendary
investors disagree, but they are among the few investors who can actually do
so.
You need to be realistic when you set
investing goals for yourself. You probably won’t be able to beat the stock
market average. You may ironically make higher returns by trying to match it
instead. One of the best ways you can do so is by investing in an index fund.
Most investment managers claim that they
can help you beat the stock market average. There are actually few money
managers that can live up to this claim. Index funds have outperformed the
majority of mutual funds and money managers on the market.
You may not think that you can make higher
returns by trying to match the stock market instead of beating it. However, the
data shows that index investors tend to actually outperform those who invest in
mutual funds or individual stocks.
Choose the Right Index Funds
There are many great reasons to invest in
index funds. That being said, you will realize more returns by investing in
some over others. You will want to look at the cost structure of different
index funds before you invest in them. Make sure that you aren’t investing in
one that charges more than a mutual fund does.
Ask your broker for a breakdown of expense
ratios of different index funds before you choose one.
Consider Investing in Index Funds
Too many investors limit themselves to
investing in stocks and mutual funds. Index funds are another option you can
consider. They will allow you to limit your risk, lower your expenses and
realize higher returns than if you invested in other securities.
