Advantages of Index Funds

By | March 12, 2010

I’ve often said that I’m a boring investor. I pretty much stick with index funds. They populate my retirement account and my son’s 529. When my husband gets a retirement plan through his work, it will probably involve index funds. While it is certainly possible that I could make more by going with different types of investments, and trying my hand at stock picking or investing in commodity futures or currencies, the fact of the matter is that it is too much work and stress for me. So I go the boring route.

Index funds are groups of investments that follow an index. This doesn’t have to be a stock index; index funds also include groupings of bonds, commodities, currencies and other investments. There are indexes based on foreign investments, on growth investments and on value investments. In fact, it is possible to create a diversified portfolio, with your preferred asset allocation, using only index funds. Once you understand the advantages of index funds, you might not want to invest any other way.

Why I like index funds

Since you can diversify, adding more growth opportunities to your portfolio, as well as creating a safety net with more stolid funds, you can lay in significant returns over time, without the same level of volatility that comes with picking individual investments. In my mind there are three main advantages to index funds:

  1. Long-term solidity: Individual investments fluctuate a great deal. However, since index funds are tied to market performance, their volatility is quite low over time periods of 15-25 years. Investments have yet to lose, overall, during spans of decades, but individual investments can lose. You may not make a big score, but if you are consistent with index fund investing, you are likely to do well enough to meet your lifestyle requirements later in life.
  2. Low costs: Transaction fees, commissions and other costs can easily eat into your returns. Managed funds are especially known for this, since you have to pay transaction fees on top of all the other administrative and load fees. Index funds, though, require little management and see little turnover. As a result, costs are generally much lower than with other types of investing, and you keep more of your money.
  3. Minimal management requirements: You don’t even have to do much to manage your index funds. If you want to create an asset allocation based on the 100 years method, that’s easy. If you are 30, invest 70% of your portfolio in stock index funds and 30% in bond index funds. If you are more daring, looking to mix it up a bit with commodities and cash, you can do that, too. You could create an investment portfolio with 50% stocks, 20% bonds, 20% commodities and 10% cash – all with index funds. All you have to do re-balance your portfolio annually or semi-annually, as you need.

Of course, not everyone likes index funds as much as I do. And you really should do your own research and maybe consult a financial professional before making a decision. I like the fact that there is minimum fuss, low costs and that my stomach doesn’t clench in fear every time the Dow takes a dive. And, since I’m planning for the long term, I have plenty of time to let my boring investment style work in my favor. I may never be a billionaire, but by the time my son is out of the house, I’ll be at a comfortable level of wealth.

This is a guest post from Miranda Marquit. She is a Freelance Writer and a Professional Blogger.

4 thoughts on “Advantages of Index Funds

  1. Pingback: Considering Your Investment Mix - Money & Investing – Banks.com

  2. The Biz of Life

    Investing should be boring like watching paint dry or grass grow, not an emotional roller-coaster. Being on the roller-coaster is more exhilarating, but harder on the wallet in the long-term.

    Reply
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