Why I Like Index Funds

As regular readers know, I have a significant amount of my investment portfolio in index funds. But I've never put in one place the reasons why I invest in index fund. That's what this post is about.

Here are some of the reasons I invest in index funds:

1. They deliver better returns than most actively managed funds due to their low costs which makes a strong case for indexing.

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

3. They are easy to manage.

4. They come highly recommended by people who manage billions.

5. Investment pros put their own money in index funds.

6. Wall Street analysts like them too.

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

Comments

[HRP]

Great source of information. Keep up the stellar job!

I just started out in and would like to get my feet wet in investing. I have saved up $10K soley for investing purpose. I would like to put them into stock index funds. My question to you is: would it be better to invest one lump sum or invest the 10K using dollar cost averaging? Morever, should I put 80% into stock index and 20% into individual stocks? I have a long way to go before I retire so I'd like to be a little agressive and see my money grow over time.

Advice from you or your readers would be greatly appreciated. I hope my questions can also benifit others in my situation.

[MoneyDummy]

Here's a challenge you might be able to help me with. I became converted to index funds a long time ago, but my husband is still insisting that we should keep investing with American funds. He says that he'll be convinced once I sit down with him and show him actual numbers which illustrate that we would have made more money over the past two and a half years if we had invested in an index fund instead of American.

The problem is, I don't know how to do that. Any wisdom?

[Skott]

HRP- if you are investing for retirement, most of that money should be invested through a Roth IRA... $4,000 for 2005 (I believe april 15 is the deadline to put contributions in for last year) and the same for 2006.

The main reason why I invest in a total stock market index fund is that I am in my mid-20's, and the biggest factor in growing my nest egg is simply to pump as much saved-money into it as I can. Earning good returns on the investment is important, but that alone won't get me to my retirement goal.

[Skott]

I suppose you could still dollar-cost-average the 2005 contribution if you put most of it into a bond index and gradually shifted it into stocks.

just my $0.02

[HRP]

Thanks Skott.

I have a 401K account through my company which is use for my reiterment funds. Given that do I still need to open up a ROTH IRA?

[Greg Bud]

I agree entirely with your sentiment! Unfortunately financial advisors don't maximise their income by offering these types of index investments so they appear to be trying to talk them down. Similarly when markets are fluctuating like now it may he better simply to take your money out and pop it into short term savings until you see which way the wind blows. It was because I couldn't find unbiased comprehensive information about these types of accounts that I built www.interest-rates.org.uk as a not for profit site offering uptodate rate information for offshore accounts - I hope this may be of help to your readers.

Best regards

[Trebonius Strawder]

Im 18 yrs and have a strong interest in stocks and bonds, I would enjoy having the opinion of those who have seen progress for themselves, so with that being said where is a good place to begin my investment????

[j]

I know very little about investing and was happy to find this site. I'm in my early 50’s, have a 457 with a value of about $59K from where I retired less than two years ago, and a current 401K that has a value of about $34K with my present employer. My current 401K is matched up to 5% of my bi-weekly salary, and I save the maximum of $15,500 plus the $5,000 catch-up. (Both employers also have defined retirement plans.) My salary in increasing by $8K/year in about a week. I own my home with a manageable mortgage, credit cards are paid off,and I have no other debt. I recently received about $60K cash, from which I will make some house improvements, put about $10K in savings for quick-liquidity, and want to invest a portion. What would you suggest are the best options for investing $10K-$20K? Thanks.

[FMF]

J --

That's a very complicated question -- one that can't be answered without a lot more information. Here's what I suggest:

1. Read all the posts in my two investing sections. They are here:

http://www.freemoneyfinance.com/investing/index.html

http://www.freemoneyfinance.com/investing_2007/index.html

2. If you still have questions, send me a complete write-up of your situation and I'll post it for my readers to comment on. They'll give you some good ideas to consider.

[Investing in Mutual Funds]

This a belated response to HRP.

Studies show that an immediate lump sum works best most of the time. The reason for this is that, long-term, the movement of securities prices is biased upward. In other words, securities prices go up and down but they go up more than they go down. But it's entirely possible to pick a really bad time to make a lump sum investment.

If the market has been on a tear for a few years, making a lump sum investment might not be the best strategy, although if you've selected a very broad investment universe and you're invested for the long term, this won't be as big of a concern. On the other hand, if there's just been a major correction, it might be a good strategy, but there's always the possibility that the correction ushered in a recession and the beginning of a protracted bear market. Again, broad diversification and long investment horizon will temper this risk.