With index funds, what you see is what you get. There are few surprises, and few disappointments. These mutual funds simply track an index, and can be very inexpensive to buy and hold. Read on to get up to speed!
Have you ever made a good call on the direction of the stock market, and then picked the wrong stock or stock fund to invest in? Believe me, it hurts. Here’s an example of what I mean.
Picture the stock market down 50% over the past year as measured by a major market index, the S&P 500 INDEX … THE index the professionals use as a benchmark for U.S. stock performance. You see opportunity and shift assets into XXX Stock Fund. Stocks soar 33% over the next couple of months (S&P 500 up 33%). XXX gains 14%. A bit disappointed aren’t you?
You could have simply bought an S&P 500 Index fund and made 33%, give or take 1% or so. Plus, index funds commonly charge less for yearly expenses. For example, .25% might be taken out of the fund each year for expenses vs. 1.5% for the average U.S. stock fund.
Here’s another example. You come to realize that sometimes stocks of countries like China, Mexico, India and South Korea are on fire when the U.S. stock market is asleep. How can you get a piece of the action without excessive risk? You’re not going to pick individual foreign stocks to invest in, because that can be very risky. At the same time, you don’t want to choose an international stock fund that specializes in just one region, because you don’t know which region to pick.
The simple solution is to invest in an EMERGING MARKETS STOCK INDEX FUND. These funds simply track the performance of numerous less developed stock markets worldwide. Now you are invested in Argentina, Brazil, China, India, Mexico, South Korea, and so on.
Here’s the last example of why index funds are popular. Real estate is cheap and you think it would be a good time to invest in the likes of shopping centers, office buildings, and apartment complexes. Real estate investment trusts (REITs) invest in this type of properties. Instead of trying to pick the best REIT, you can simply invest in a REIT INDEX FUND, which tracks the performance of the nation’s largest REITs.
If you want to simplify your life as an investor, don’t stress over picking the best- performing mutual funds. Go with the flow with index funds.
A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals. Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com