How To Retire Early: Your Guide to Getting Rich Slowly and Retiring on Less by Robert Charlton & Robin Charlton
Author:Robert Charlton & Robin Charlton [Charlton, Robert]
Language: eng
Format: mobi
Publisher: Where We Be Publishing
Published: 2013-03-21T04:00:00+00:00
Why Index Funds Make Sense
If you think of investing as primarily a means to an end and not a passion in and of itself, then index fund investing might be the right answer for you. Itâs a great solution if you want to keep your financial life as simple and low-maintenance as possible.
With index funds you stop trying to beat the markets and instead simply keep up with them. Index funds mirror the markets they track instead of trying to beat them. They replicate as closely as possible the investment weighting and returns of the benchmark index they are designed to track.
Perhaps the most famous index fund of all is also the first ever created: the Vanguard 500 Index Fund, which tracks the S&P 500 Index. It was created by John Bogle of The Vanguard Group in 1975. Vanguard is now the largest mutual fund company in the U.S., and the fund has become a mainstay of many an investment portfolio.
Built-In Diversification
When you buy an index fund, you are buying a whole portfolio of stocks in a single fund, so your risk is lower if any one of the companies in that fund should plummet in value or go out of business. The diversification provided by an index fund means your investments are spread out over many companies and usually over many asset classes. This can be a comfort to those who feel they are not quite up to the task of accurately evaluating a single companyâs health and financial prospects based on a balance sheet alone. Rather then betting your future on one stock or a handful of stocks, you can spread your risk over hundreds or even thousands of stocks and sleep better at night because of it.
Better Performance
Because index funds are passively managed, their fees tend to be very low, and because of that they actually tend to perform better over the long run than most actively managed mutual funds. This comes as something of a surprise to most people when they hear it for the first time. After all, youâd think an investment manager with all his accumulated knowledge and experience would consistently be able to beat a passively managed index fund, and yet except in rare instances this is not the case.
Why? Because the active fund manager has to charge higher fees than a passively managed index fund does. Of course the active manager expects to be paid for his services, and he also tends to trade more frequently than a passively managed fund does and thus has to cover those higher trading expenses. Over time those higher fees serve as a drag on performance â a drag the vast majority of active fund managers canât overcome over the long term. By comparison, index funds charge very low fees for the services they provide and as a result offer hard-to-beat value to the individual investor.
We like the fact index funds arenât at the mercy of any one person, no matter how well intentioned. Even a good fund manager sometimes makes bad investment choices.
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