Why I Like Index Funds (Updated)

Back in March I wrote Why I Like Index Funds, a post that gave all the reasons I invest in index funds. But since then, I've written a lot more about the benefits of this simple yet effective way of investing, and I wanted to update that original post to include these pieces. So that's what I'm doing!

That said, here are some of the (updated) reasons I invest in index funds:

1. They deliver better returns than most actively managed funds. Also see: The Basics of ETFs (bottom), Why Index Funds Outperform Other Investment Options, and Another Win for Index Funds: They Out-Perform the Best Investment Newsletters.

2. They are able to deliver these great results in part because of their low costs. And, as we know, low costs lead to higher returns. Also see Expenses, Taxes and Size Matter in Choosing Bond Funds (And Stocks too!) and The Advantages of Index Funds.

3. They take a minimum amount of time to manage.

4. They are easy to manage.

5. They come highly recommended by people who know investing including:

• Those who manage billions.
• Investment pros investing their own money
• Top-rated Wall Street analysts
• Wealthy individuals and investing experts

In short, index funds perform well and are an easy way to invest for me -- that's the bottomline of why I use them.

If you want to see more thoughts on index investing, see Interview with John C. Bogle on Investing.

Comments

[Zoe Brillantes]

Hello FMF,

Have you seen this article in the NY Times about indexing? I think you'll like it.

October 29, 2006
Fundamentally
If You’re Playing ‘Beat the Benchmark,’ Don’t Expect to Win By PAUL J. LIM
http://www.nytimes.com/2006/10/29/business/yourmoney/29fund.html?_r=1&ref=yourmoney&oref=slogin

[FMF]

Thanks -- I'll check it out!

[Denis]

I'm young and want to start investing in index funds. Where do you recommend I go to open an account? I'd start out w/ about $1500.
Thanks

[FMF]

Denis -- I'd recommend Vanguard. I've always had great service from them. (though I'm not sure of their minimums.)

[A.]

Totally agree with your post. Index funds are particularly appealing to me because I can be pretty lazy about keeping an eye on things and I don't have fund managers trying to bleed me dry. Here's an article I found on MSN and I was wondering what you make of it:

http://articles.moneycentral.msn.com/Investing/MutualFunds/JustBeatingTheMarketIsTooEasy.aspx

[Steven W]

You missed just one advantage of index funds - they are tax friendly. Index funds have not only lower fees, but also save you from taxes (due to the fact that index funds hold the stock longer than the other types of mutual funds) and thus generate higher returns by allowing you to invest those saved money.

source: http://www.mutual-funds-advisor.com/index-mutual-funds/index-mutual-funds-definition.html

[Investing in Mutual Funds]

You're right, when it comes to low mutual fund expenses, it just doesn't get any better than with index funds. One of the primary reasons for this is that they employ statistical sampling techniques to create portfolios that track their respective indexes very closely.

Statistical sampling makes it possible to track an index very closely while avoiding the cost of constantly buying and selling securities to maintain a scale model of the index. If an index fund actually owned all of the securities in an index and maintained the appropriate weighting, the trading costs would erode the fund's NAV and result in persistent under-performance.

[02millions]

I checked out the vanguard index funds the return wasn't that great, it's about the same as putting in a CD am I looking at the wrong thing. I know the market has been in shambles, with the market the way it is do you still feel an index fund is the best investment?

[FMF]

2 million --

I feel it's a great investment OVER THE LONG TERM. I have a 20 to 30 year time horizon, and I keep putting more and more into them.