Advantages of Index Funds

One of the easiest ways to get started with investing is to use index funds. Index funds track a specific index, which means that your investment does as well as the overall performance of a fund. That means that if you buy an index fund that tracks the S&P 500, you will gain as the S&P rises, and lose at it falls. There are a number of indexes that are followed by these funds. These indexes include the Russell 2000, Dow Jones Industrial Average, clean energy stock indexes and even an all-market index that tracks every publicly traded company. There are index funds that track European and Asian stock indexes as well. You can even invest in index funds that follow bond indexes (making it possible for you to build a 70/30 stock/bond allocation with only index funds).

Index funds have a number of advantages. Here are some of the ways that you can benefit when you invest in index funds:

Easy to get started for beginners. Index funds are easy to get started with. Many brokerages offer the ability to start, opening an account online, for a low minimum deposit (even lower if you open a retirement account). Additionally, using index funds means that you do not have to try and pick stocks, making investing easy and reasonably stress free.

Low cost. Because index funds simply track an index, there is no need to charge fees in order to pay fund managers. Index funds have low costs, mostly confined to administrative fees which mean that costs 1% to 1.5% lower than traditional mutual fund costs. Low turnover in index funds also means that you do not incur the costs that come with trading when actively managed funds buy or sell shares in companies.

Emotional peace of mind. Index funds provide emotional peace of mind. Over time, stocks go up. Over a period of 25 years, the stock market has not lost value. For long-term investors, index funds provide the peace of mind that comes with knowing that, no matter the short-term fluctuations in the market, you are likely to come out ahead over the long haul.

It is important to note, thought, that index funds can lose out. While they have never lost over the long-term, if you decide that you need to pull out (or if your retirement comes) during a down market, you could lose some of the value of your investment portfolio. It is also worth noting that index funds do not yield impressively high returns. You are more likely to average something between 7% and 9% over the long-term.

Disclaimer: I am not an investment professional. This should not be construed as investment advice. All investment carries the risk of loss. Before investing, do your own research and/or consult with an investment professional.