Why I Like Index Funds, Part 3

I've previously detailed why I like index funds on two separate occasions. First, I wrote Why I Like Index Funds in March of last year and followed it up with Why I Like Index Funds (Updated) in August 2006. But since then, I've written so much about index funds that it's worth another post/update to make sure all the information is in one place (it makes it easier for me to refer to this when people ask why.) That said, here are the reasons I like index funds:

1. They deliver better returns than most actively managed funds.

For more thoughts on this topic, see these links:

• Why Index Funds Outperform Other Investment Options

• Why Indexing is So Effective

• More Reasons to Invest in Index Funds

• 10 Rules for Building Wealth, Part 3: Invest in Index Funds

• 10 Rules for Building Wealth, Part 4: Don't Try to Beat the Market

• The Basics of ETFs (bottom)

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.

For more thoughts on this topic, see these links:

• Index Investing Out-Performs Most Actively Managed Funds, Costs Taxes are Why

• Why It Matters Which Index Fund You Own and How You Buy It

• Minimize Taxes to Maximize Your Investment Return

• Costs Matter If You Want to Maximize Investment Returns

• How High Mutual Fund Fees Can Cost You Millions (Another Reason You Should Love Index Funds)

• 10 Rules for Building Wealth, Part 8: Hold Down Fees

• Expenses, Taxes and Size Matter in Choosing Bond Funds (And Stocks too!)

• The Advantages of Index Funds

3. They take a minimum amount of time to manage. See Another Vote for Index Funds -- They Save Money and Time for additional thoughts.

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.

• Charles Schwab

• A top stock investing firm.

• Many others -- see Quotes about the Effectiveness of Index Funds and More Quotes about the Effectiveness of Index Funds

6. Using them, it's easy to diversify.

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

[Fabulously Broke]

Excellent! Someone who loves index funds as much as I :) I'm thrilled to read more support about index funds, as it is my core holding, and my other holdings are much more diversified.

[New vans girl]

Id not heard of index funds before thank you for the links will take some time to go through them but I think it will be worth it.

[bill]

Hi, I've heard a lot of good things about index funds. How do these funds compare to top ranked mutual fund in a down market. It appears that they have the advantage in a bull market, but what about a bear market?

[FMF]

Bill --

It depends on the type of index fund. If you have a fund that tracks the market, it will be down with the market (by definition) in a bear market. But what does that really matter? For long-term, consistent investors, market swings shouldn't impact your investment strategy.

[becky]

One of my financial goals this year is to begin investing money for both short-term and long-term financial goals (outside of my 401k) and I've been thinking about possibly purchasing index funds...what's the best way to actually buy them?

[FMF]

Becky --

I buy them through Vanguard (my investments) and Fidelity (401k). Both offer good, low-cost index funds.

[Kevin]

I like Vanguard too. Unfortunately my 401(k) only offers American Funds which are pretty expensive compared to index funds.

[Independent George]

I think 'bill' and 'vans girl' are spam.

[PDR]

It continues to astonish me how people thin that index funds are great. With a average return of 2.88% over the last 10 years the S&P 500 index has under performed everyone of the active managers I use in the Large Cap areana. Not only that they have outperformed the S&P 500 for every 10 year rolling period dating back to 1969. Investing is not brain surgery, invest with active managers who have a straegy that works and is repeatable.

[FMF]

PDR --

If you invest with active managers, odds are that you're earning way less than index funds. The costs are simple too high and the vast majority of active fund managers (80% or so) simply can't overcome them and beat index funds. This is why top investors like Warren Buffett recommend index funds as the best investment for most people.

[Ed]

PDR -

Index funds that follow the S & P 500 are not the only index funds out there, and if one is to only invest in an index fund that only tracks that S & P, they are only exposing themselves to Large Cap Balance stocks. I aggree with you in that the S & P return has not been steller, however if you invest in only index funds and invest over then entire market, (i.e. Large Cap Value, Small Cap Growth, Mid Cap Value....... Hard Asset.... Internation Large Cap Growth.... EM... the list goes on and on, and you can get low cost index funds for all) then you are in a much better position than 99% of the activily managed funds.... Sure there are the guys that seems to always bet the market, but they are few and far between.

[Bud Munro]

Hey, I'm just a small investor, and I've been told that I should be buying no-load mutual funds, and apparently there's all kinds of them focusing on different commodities, stocks, industries,k etc.

The big reason to go for no-loads, I was told, is that I don't have to pay anything going in. But what's the downside?

I read an article that you have to pretty much do your own research, which would be a big drawback for me, as I don't know what I'm doing really. But there are agencies, like Morningstar, that rate them.

Any advice?

- Bud