3 Advantages of Index Investing

index investing

My Take on Index Investing:

Index Investing funds have as a primary objective to match the performance of a particular stock index such as the S&P 500 index or the Dow Jones Industrial average . Checkout this book The Little Book of Common Sense Investing on the advantages of mutual funds written by John C. Bogle the Founder and former CEO of the Vanguard Mutual Company.

The advantages of index funds are:

1. Index Funds minimize costs. A typical fund company produces a construct portfolio out of the stocks in a chosen index like the S&P 500. The fund is passively managed, with changes being made only to fine-tune the fund’s performance to match more closely the index’s results. No highly paid stock analysts are needed. The alternative is an actively managed fund, which is more expensive. Typically expense ratios of an index fund ranges from 0.15% for U.S. Large Company Indexes to 0.97% for Emerging Market Indexes. The expense ratio of the average large cap actively managed mutual fund as of 2005 is 1.36%.

2. The index funds eliminate the investors need to spend too much time picking stocks or worry too much about returns. You can be fairly assured that your performance will match the overall performance of the market index you select. Funds usually get rebalanced once or twice per year.

3. The index funds have lower turnover of the securities by the fund manager thereby reducing the chances of capital gains taxes. Selling securities may result in capital gains tax charges, which could be passed on to fund investors. Because index funds are passive investments, the turnovers of stocks are lower than actively managed funds thereby reducing costs.

A highly recommended Index Mutual Fund company is The Vanguard Group, Inc. They have some of the lowest cost index funds in the industry.

Investopedia Says:
Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500.

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