Why Index Funds are The Best Value For Money

Index funds are the best value for money when investing.

I’m not here to sell you index funds.

But I think index funds are THE best option and value for money if you’re a beginner investor. Why…

When you invest money in an index fund, your investments are spread out over many different stocks and bonds across the entire market.

You’ve invested in every stock in an index (a list) in proportion to the size of each company in that list.

And if you own a piece of every stock in that list, as long as you pick or invest in the right index fund or list, you can’t lose.

If one company does poorly or has bad news about them (like the Boeing scandal), your investment isn’t affected much because there are many other companies in this portfolio.

So What Does This Mean?

Even though index funds might have lower returns than some individual stocks or mutual funds, index funds will likely outperform those higher-risk options over time!

For example, your index fund or list is the S&P 500.

You would own a piece of the 500 biggest stocks in the United States. And by holding that index, all the stocks in the index or list are priced right.

Holding a percentage of 500 different companies in one fund is a great way to fully diversify your portfolio and guarantee your fair share of growth.

Index Funds – The Best Value For Money

Top investors, such as Warren Buffett, recommend index funds as the best investment for retirement planning purposes.

And because index funds are great for retirement planning, you’re leaving money on the table if you’re not considering investing in index funds.

The basic philosophy behind index funds is not new. They’ve been around for decades, and there are clear benefits to using them.

The funds offer the most beneficial combination of cost, quality, and sustainability. Or, put another way, the best value for money.

In fact, on many occasions, they are the cheapest way to invest in different markets. There are indices or indexes for every imaginable investment vehicle, from stocks and bonds to precious metals and money market accounts.

And if you’re still confused about an index fund, think of it as a pool of money collected from many different investors.

This money is then used to invest in “securities” designed to match or track certain components of a market. Index funds are a simplification of investments that spreads the risk over many holdings.

Investing but with far less risk.

And because it’s better to have as little risk as possible in any market, index funds will allow you to ride out Bear Markets and profit more from Bull Markets.

Why You Should Buy Index Funds

Overall, index funds offer the following advantages:

(1) Diversification

As you may have heard, diversification is the key to lowering your investment risk in many financial advisors’ opinions.

It’s challenging to beat market returns consistently. For example, by personally selecting individual stocks, maybe 1% of investors can beat the market returns. And if you are in the 1%, then congratulations. You’re an elite investor.

But chances are you’re not.

And you CAN’T consistently beat the market every year. So when you pick individual stocks over buying and holding index funds, your returns will go up and down like a yo-yo.

But the market, a market sector itself, and index funds don’t fluctuate as much. They’re likely to continue going up and will grow in the long term.

You need to be patient, give it time to grow, and let compound interest work for you.

Indexing allows you, the investor, to participate in the entire market by investing in a collection or pool of stocks.

Take the Dow Jones Industrial Average (DJIA) as an example. The DJIA is composed of 30 large companies, all in the industrial sector.

To minimize risk, the DJIA has built-in “stop-losses.” If an investment value falls too low, it will automatically be sold. And this stop-loss is even adjusted every three months.

Plus, the diversity offered by index funds allows for both sector and geographical diversification.

Index funds also help balance your allocation amounts and maximize your long-term returns.

(2) Ease Of Investment

Few of us should exchange valuable free time in hopes of making more money on a risky investment.

Not to mention the effort it takes to digest the huge amount of information available to you on different investments. Index funds make investing easier while providing the best value for money.

When buying index funds, all you have to do is:

  • Have your paycheck automatically deposited into your checking account
  • Invest with Vanguard or Fidelity, or another place of your choosing
  • Set up automatic transfers from your checking account to your investment account
  • Buy index funds in your investment account

That is all that’s required to invest in an index fund.

Each fund, once purchased, has a dedicated team that will monitor the funds and choose investments that are likely to increase in value.

And this dedicated team can often act more efficiently than an individual investor like yourself.

(3) Lots Of Low Costs Options

Index funds deliver identical returns on a gross basis as a standard market index. So if the stock market goes up, returns or investment profits from your index funds will also go up.

And on a net basis, index funds outperform many other investments by a substantial amount. That’s because every investment has costs associated with it. So no matter what you are invested in, there is some trade-off or cost to buying and investing in it.

For index funds, it’s called an expense ratio.

And every good index fund has a small expense ratio. Therefore, the owners of index funds keep most of the money and profits.

(4) Nearly Guaranteed Income

Index funds allow you to own more than one stock in your portfolio.

They also have lower operating expenses and a lower portfolio turnover rate by simply attaching growth to a market index instead of an individual investment.

There is almost zero probability any index fund will ever lose all of its value.

Sure, the entire market could fall into a recession. But, in that case, buying and holding index funds are safer. Why…

Because an entire market sector like real estate and technology does not disappear overnight, look at Enron.

Certain companies might and will go out of business in due time.

And since index funds are based on the performance of several companies combined, index funds do not go through significant fluctuations.

Nor will index funds ever go out of business.

And I like investing in things that’ll never go out of business, like investment real estate, index funds, and Bitcoin.

What to Expect When Investing in Index Funds

With lower risk comes smaller potential gains.

Index funds don’t seek to outperform the overall market. They seek to match it. Investing in index funds is also completely passive by design, and unlike buying and selling individual stocks, there isn’t any active trading involved.

Buy and hold onto them for as long as you can.

And overall, your profits with index funds are much higher in the long term than investing in individual stocks.

They’re not a high-risk, high-reward individual investment that will go down in value over time and offer lower and lower returns.

For example, let’s say you’ve identified an index in which you might be interested. And you decided to put your money in precious metals like Gold. You do your research and choose a Gold ETF.

By buying different gold-related individual stocks in your portfolio, you are directly invested in the ups and downs of the gold market.

However, because of the risk involved in owning individual stocks, the potential losses will be higher.

And a hard lesson for many investors, and one that escapes them, is this: their portfolios’ value can change instantly.

But that’s not the case when you buy and hold index funds.

Index funds are the safest investment method, offering the best value for money. Investors comfortable with index funds should know they are getting the best value for their money in the long run.

Other Things to Keep in Mind

While everyone has different investment goals, index funds are an excellent choice.

Whether you’re trying to:

  1. Put your money to work
  2. Plan for retirement
  3. Or save for another long-term goal

You want to find the best value for money. And there are many, many index funds out there.

Doing some research will help you break down the differences between them. And also help you narrow down your choice to the ones you want to invest in.

But don’t be scared to invest your money in index funds. They’re simple and easy to understand.

You can read the fine print on every fund and figure out how they invest your money, how they’re similar, and how they’re different.

Just pick a reliable and well-known fund. Check to see what kind of returns the fund had over the last 5, 10, 15 years, and so on.

You want a fund with a long record of consistently producing returns as good as the market.

But always compare the funds’ return to the overall stock market return. Yes, there will be a little variation each year. But the long-term record is what you need to focus on.

And once you’ve picked a fund, do a little extra research to see if you’re comfortable with how it invests. Don’t be intimidated by all the numbers in the prospectus. Again you want the best value for money.

I then recommend looking at the different expense ratios, investment strategies, and fund sizes. All of which can influence how your investment performs and overall returns.

And regardless of your investment strategy, I know there’s at least one index fund out there that will be a great fit for you.

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