First, a quick overview. A stock market index measures a specific portion of the stock exchange spectrum. The Dow Jones Industrials (the largest stocks) and the Standard and Poor 500 (the 500 most valuable stocks in the US by market capitalization) are two of the most well-known indexes. Many indexes track different industries, capitalizations, and other aspects of the market.
An index fund attempts to mimic the behavior of stocks in a specific index. An index fund does not require analysis. It simply ensures that the portfolio matches the index being tracked. The fund will be easier to manage due to fewer trades and lower capital gains. These cost savings can add up over time and are passed onto the customer – you.
Why You Should Invest In Index Funds
For most investors, index funds are a great option. These are five compelling reasons to choose index funds:
- Management Fees These funds have significantly lower management fees than actively managed funds. This can translate into thousands of dollars over a 10–30-year period.
- Tax Advantage – Index funds are not actively managed so there are fewer trades, and therefore fewer capital gains being passed to you. This means that taxes are much simpler.
- Performance It is a well-known fact that index funds perform worse than actively managed funds. Although it is possible to surpass them, due to the tax and expenses, the odds of you succeeding are not in your favor.
- Personal time Researching investments, particularly stocks and mutual funds requires patience and understanding. Index funds are much easier to invest in.
- Beats Stocks. Index funds are better than stocks for many reasons. You get more diversification, less research, and lower fees each year.
You could also invest in individual stocks but this would be more costly. We hope you are convinced to use index funds as the core of your portfolio investments. Good luck.