A reader sent me the link to this article where Kiplinger's raves about index funds. We'll start with why they love index funds:
Beating the market's return consistently is a very hard thing to do, and that's why we celebrate the handful of mutual-fund and hedge-fund managers who manage to do it. But we can—and do—get carried away with the idea of beating the market. Studies show that having the right mix of stocks, bonds and other types of investments in your portfolio adds far more to your return than stock picking.
Over the long run, a well-diversified index portfolio gives most investors a better return than a comparable portfolio full of funds run by highly paid portfolio managers. A key reason is expenses. The average annual expense ratio for a non-indexed U.S. stock fund is 1.4%. Many index funds cost less than half that much. And that does not include other costs—such as trading commissions and taxes, both of which tend to be lower for index funds—that are not included in the expense ratio. Index funds are also generally tax-efficient because trading is kept to a minimum.
And one of the key reasons index funds perform so well -- they keep expenses low:
When it comes to indexing, the expense ratio is the biggest factor in separating winners from losers. The E*Trade S&P 500 Index fund (ETSPX), for example, charges just 0.09% annually for expenses, and its annualized return over five years to December 1, 2007, is 11.4%. The Dreyfus S&P 500 index fund (PEOPX) costs more than five times as much -- 0.50% annually -- and not surprisingly, it has produced a smaller five-year return (11.1%). The difference may seem insignificant, but for a $10,000 portfolio, the cheaper fund puts $1,000 more into your pocket over ten years.
I couldn't agree more. ;-)
To see some of my thoughts on index fund investing as well as additional endorsements, check out these links:
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