What Is Better Measurement For Stocks The Djia Or S&P Five Reasons to Invest in Index Funds

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Five Reasons to Invest in Index Funds

Overview

First, a quick overview. A stock market index tries to measure a portion of the stock market spectrum. The most famous indexes are the Dow Jones Industrials (30 largest stocks) and then Standard and Poor 500, or S&P 500 (the top 500 US stocks by market capitalization). There are plenty of indexes that track a multitude of industries, capitalizations and other parts of the market.

An index fund attempts to mimic the behavior of stocks within a particular index. There is no analysis or decision making that is required, just making sure the portfolio continues to match the actual index being tracked. This means a lower number of trades and fewer capital gains – the result is that the fund is substantially lower to maintain. Over time, these costs savings can be significant – and they get passed on to the customer – you!

Reasons To Invest in Index Funds

Index funds are a great choice for most investors. Here are five compelling reasons why:

  1. Costs – the management fees are significantly lower in these funds than actively managed funds. Over a 10-30 year time horizon, that can mean tens of thousands of dollars or more!
  2. Tax Advantaged – since index funds are not actively managed, there are fewer trades and thus, fewer capital gains being passed on to you. This also means much easier taxes.
  3. Performance – it is a proven fact that the majority of actively managed funds underperform index funds. While it is possible to outperform them, with the expenses and tax implications, the odds are stacked heavily against you.
  4. Personal Time – researching investments, specifically stocks and mutual funds, requires time and understanding. Investing in index funds is much faster.
  5. Beats Stocks – for most of the reasons above, index funds are a much better choice than stocks – you get built in diversification, less transactions, less research, lower fees annually.

Now you could invest in individual stocks, but it would probably be a more expensive hobby. Hopefully we have convinced you to at least consider using index funds at the core of your portfolio investments. Good luck.

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