The toughest part of investing in stocks for most people is stock selection. There are thousands of listed companies in the marketplace that you may invest in by doing your own work and research. An easier way to invest in a diversified portfolio of stocks is to invest in index funds. Here is some information on the benefits of investing in index funds.
What is an index fund?
An index fund is a mutual fund that attempts to match the performance of a major market index. For example, the Dow Jones Industrial Average. The way it does this is by investing in the exact same companies as the average and at the same proportions. It mirrors the index exactly. This way if the average goes down, the fund goes down. If the index rallies, so does the fund. So what are the benefits to index funds?
Guarantee average returns
Most investors aim for above average returns in investing but most fail. Most even fail to achieve average returns. You want to achieve the market average at least. You can guarantee the market average by investing in index funds. The index fund is the average so as soon as you make an investment you know you have achieved the average.
Outperform over 80% of all actively managed funds
Average still doesn’t sound good enough. Well if you placed your money into an actively managed fund then there was an 80% chance you would end up with less money. Actively managed funds employ analysts and investment experts to try and achieve huge returns. In fact they can’t beat an index fund most of the time. Invest in an index fund and you know that there is a 4 in 5 chance that you will do better than investing elsewhere.
One of the reasons that actively managed funds under-perform index funds is that they are expensive to run. They have to employ fund managers, analysts and traders and whole host of other experts to give you perceived value. Index funds just follow the average so they spend very little money. This is reflected in the return you receive. You lose little in fees.
When you are saving and investing for retirement you want to ‘set and forget’ your investment as much as possible. You want to be able to invest your money, achieve the market average and in 20 to 30 years you have a large nest egg for retirement. Index funds allow you to do that. Pick an index fund for so don’t waste valuable time and money.
Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.