While you may already know that index funds are one of the smartest choices for building up a financial portfolio, you may not always be entirely sure why. There are many advantages to be gained by investing in index funds. As a collection of stocks and bonds that cover a specific area of the financial market, it is a way to get a taste of the stock market without putting everything at risk.
Advantages of Index Funds:
There are several good reasons why you might want to invest in index funds as part of your investment strategy.
Passive Management: In most cases, when you purchase a mutual fund, you are purchasing active management as well. You get a financial fund manager whose goal is to buy and sell on the market with the goal of increasing its value over time. This can be a very effective way to "beat" the system but you also run the risk of human error. They may make poor decisions, which can cause you to end up losing more than you gain. Statistics show that around two-thirds of these funds are unable to outperform the market in periods over 10 years. But with passive management, that is not the case. When you purchase an index fund, your goal is not to "beat the system" but to match it. It's a more reliable investment strategy.
Diversify Your Portfolio: As an investor it is possible to capture the returns of a large portion of the market in just a single index fund. Since it is possible for an index fund to tap into thousands of different holdings, you can tap into more of the market, and lower your risk all at the same time.
Lower Costs: Financial investing can be expensive. With fees for every transaction it can be difficult to keep your overall costs of owning the fund from eating up any profits you have already made. But when you invest in index funds, the costs are consistently low. Because you're not paying for an active manager, you can dedicate much of your time to researching potential stocks or bonds to buy or sell. This way, you will be able to keep more of the returns that are earned on your investment.
Index Fund Strategies:
For the new investor, it can be daunting to know where to start in the index fund market. While they are the lowest cost funds offered, many experts suggest that the best strategy for newcomers is to choose the "plain vanilla" funds for their initial investment. They carry the lowest cost for management and can still be competitive in the market over the long hauls.
Investing in index funds can be one of the smartest ways to get into the stock market. While they will rarely yield the huge returns to be gained by many of the more popular stocks, their low cost, broad diversity, and lower risk make them a smart move for the newest investor in the market. As you grow your knowledge and skill in investing in index funds, they can also be a great way to launch into major stock market investing.