In terms of investing there are two main options:
Try and beat the stock market
Grow with the stock market
Which is better? Well it is a personal decision, but results show that growing with the stock market will provide a greater chance of success and profit. Simply put, the index fund will essentially purchase all of the stocks and bonds within a specific index as seen below, to the same proportions in which they exist within the index. In contrast, trying to beat the stock market means you or a Fund Manager picks specific stocks within the S&P 500. A common stat indicates that the S&P 500 almost always outperforms 80% of mutual Funds. Index funds essentially track the performance of a specific index.
Some common indexes are as follows:
S&P 500 index
Dow Jones Industrial Average
Russell 1000
Wilshire 5000
Advantages of Index Funds
Low Cost:
Simply put, it costs less to run and manage an index fund. Generally, expense ratios range from 0.15% to 0.95% for Index Funds. In comparison, Mutual Fund expense ratios can range from 1.3% – 2.5%. Along with low costs, usually index funds don’t have charges known as loads, which most Mutual funds do. Of course the difference between 0.15% and 1.3% doesn’t seem like a huge amount, but essentially it is money that you are eliminating from your investment which really does belong to you. Also after 30 years the difference in the expense ratio can add up to a large sum of money lost.
Lower Turnovers:
Turnover refers to the selling and buying of securities by the fund Manager. Since index funds are classified as passive investments, the turnovers are lower than actively managed funds.
Low Maintenance:
Index Funds are easy to understand. You don’t have to constantly be on the search for the best one stock within the market, rather just know the target index you which to invest in.
Downfall of Index Funds
Can’t outperform the target Index:
Once you invest your money into an index fund, you will not outperform that fund; rather match it in value minus the fund expenses.
So are Index funds a good choice for you?
Well, if you are looking to gradually increase the value of your investment, payout a small fee, and spend very little time tracking your fund, then Index Funds are right for you.
Important Facts to remember:
*Stocks, on average have gained 8.7 % per year over the past 80 years. Inflation over the last 80 years was on average 3.21% increase
*Own stocks, through Index Funds with lower expense ratios and greater chance to profit
*In 1990 14% of active Managers actually beat the market. 2006 only 0.6% of F.M beat the market after fees.
*Index Funds grow with the market
Below is a graph (from Wikipedia.org) of the S&P 500 market since 1950. You will notice the gradual overall increase, from 1950 to present time. For example; look at 1980 value which seems to be around 110, compared to 2009 which is around 1500.
July 28, 2009 at 2:05 am
Excellent research in this post! I learned a thing or two about index funds from your post that I never knew before.
Very well written, in-depth analysis
July 28, 2009 at 2:15 am
Thank you! I am glad that i could uncover some information about index funds.
August 6, 2009 at 11:16 pm
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