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One of the most sought after goals of investors is to "beat the market" When one talks about "the market", they're likely to be referring to the S&P 500 or the Dow Jones Industrial Average.
So why are people flocking to put their money in mutual funds when 85% of them can't beat the market? Good question. Many people don't realize the simple advantages of index funds. Index funds are mutual funds which try to mimic the overall market. For example, a mutual fund trying to mimic the performance of the S&P 500 would simply buy every stock in that index. This pretty much guarantees that the performance of the index fund will be similar to the performance of the S&P 500.
Investing in an index fund is one of the the easiest and least time consuming strategies available to an investor and the best part is you'll never under perform the market. Of course, the disadvantage is that you'll never outperform the market either.
Types of Index Funds
For almost every type of index, you're sure to find an index fund which mimics its performance. For example, there are over 15 index funds which mimic the performance of the S&P 500. The following are the most popular index funds:
Dow Jones Industrial Average (DJIA)
Standard & Poor's 500 Composite Stock Index (S&P 500)
Russell 2000
Wilshire 5000
Advantages of Index Funds
There are plenty of advantages to choosing index funds. The main one is that you'll automatically beat about 85% of all professional money managers. When you buy a typical mutual fund, you have a 3 in 4 chance of losing to an index fund.
A second advantage is the low cost. While most mutual funds charge management fees up to 4%, you can invest in most index funds with a fee of less than 1%. The reason why the fees are cheaper is because an index fund doesn't have to pay a money manager to research and choose stocks. The SSGA S&P 500 (SVSPX) index fund, for example, has a fee of only .16%. This is unheard of for most mutual funds.
Another positive for index funds is that they are tax-efficient. They take advantage of the lower tax rate due to long term capital gains. While most mutual funds buy and sell stocks on a daily or weekly basis, index funds keep their holdings for the long term, thus lowering the tax on gains.
Finally, index funds save you time and energy while promoting long-term investing. You don't have to think about your stocks on a daily basis since you know you'll be getting the return of the overall market. You don't have to subscribe to any newsletters or magazines and you really don't need to know anything about investing.
Isn't it crazy how a novice who doesn't know anything about investing can beat the professionals 85% of the time by investing in index funds? I guess the old saying is true...If you can't beat 'em, join 'em.
It's great to to try to beat the market, but is it worth it? How many investors can honestly claim to beat the market consistently year after year? Not many. In fact, less than 15 % of professional money managers have been able to beat the performance of the S&P 500 over the last 15 years. Less than 15%!!!
This is probably the most popular and widely tracked index in the world.
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This index represents 500 stocks chosen by Standard and Poor based on factors such as recognition and stability. This is perhaps the 2nd most followed index in the world and one that most professionals feel reflect the overall market.
This index is made up of the bottom 2000 companies in the Russell 3000, which tracks the 3000 largest stocks in the U.S.
This is the broadest index which tracks practically all U.S. stocks. Contrary to popular belief, this index is made up of nearly 7000 stocks, not 5000 as the name imposes.
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