Here's a piece from USA Today that suggests the best portfolios are as simple as pumpkin pie. In it, the author recommends, as you may have guessed from the title of this post -- index funds. Here are his main thoughts:
Over time, fees add up. Suppose your fund earned 11.5% before expenses. A $1,000 investment would become $26,000 in 30 years. But you actually earned 10%, after your fund took its 1.5 percentage points, so your $10,000 became $17,500 — an $8,500 difference.
Rather than holding a dozen average funds, you'd be better off owning a single highly diversified low-cost index fund as your core holding.
He's singing my song. ;-)
Seriously, these are just a couple reasons I like index funds.
The piece ends with a short and simple comment I want to highlight:
Keeping your portfolio simple can save time and money.
Most people understand the "save money" portion of this statement because they realize that costs matter if you want to maximize investment returns. However, most don't understand the impact investing in index funds has on time. Consider the following:
- Investing in index funds -- There's initial set-up time to select the funds and have automatic deposits routed to them, but after that, the time commitment is minimal.
- Investing in stocks/other mutual funds -- This takes time and effort -- and a good amount of it, especially if you're buying individual stocks. You need to do the proper research (much of which is wasted -- most people only buy a fraction of the stocks they research), buying, tracking, selling, paperwork, etc. to keep watch over your stocks. Even if this only takes a couple hours a week, it still costs you over 100 hours (over five days!) each year. Yikes!
With index funds, you not only get a great return, but you save a bunch of time as well. Want more details? Check out why I like index funds.
Except, of course, there is no one index. The best one can do is one index per major asset class, and ones asset classes should range wider than "stocks" and "bonds".
Posted by: Lord | December 04, 2006 at 03:12 PM
I gravitated towards index funds after reading "The Intelligent Investor". Although I'm investing a considerable percentage of my income, I have a lot to learn when it comes to evaluating and choosing investments appropriately.
I don't want to risk all my money in speculations so I'm sticking with index funds for now. Once I'm better versed at analyzing investments, I'll branch out on my own some, but till then I'll index away!
Posted by: moneysmartlife | December 04, 2006 at 03:25 PM
I've been doing some research on what to investment and so far I also am leaning toward anindex fund.
Posted by: Moneywalks | December 05, 2006 at 01:28 AM
Even when you don't have the choice of an index, you should choose the one most like one by selecting for the lowest fees and turnover.
Posted by: Lord | December 05, 2006 at 02:59 PM