As you’ve probably heard, index funds are a fantastic way to invest your money. They let you own a piece of a portfolio of stocks, bonds, and other securities, to help you build your own portfolio that is truly unique to you. But what makes index investing truly great is that it’s not just a passive investment strategy that you follow blindly.
What do you mean by index investing?
Index investing is a simple way to invest your money. It involves investing in a mix of the stocks in an index. For example, the DOW is the most common index in the US. If you had a portfolio of the 50 largest stocks in the DOW, you could be assured of being invested in the market’s health. The cost of indexing is that you have to invest in a certain number of stocks to get the full index effect. To get the same diversification, you would have to buy many more stocks to get the same return.
Index Investing is something that almost every person has heard of, but few understand the benefits of. Instead of relying on a few experts to decide what companies to invest in and what the market is going to do, index investing allows you to focus on the simple concept of diversification. That is to say; instead of putting your money in one or two stocks and hoping for the best, you are spreading your investment across thousands of companies that are chosen by the market itself.
There are a lot of things that make index investing great, but here are 5:
- You don’t need to know much about index investing in getting started.
Index investing is a great way to get involved in the stock market, and the benefits are fantastic. There are no commissions, no complicated forms to fill out, and no loads to pay. If you are looking to invest, then you should start by investing in an index fund. A portfolio that an index fund handles is not different from a portfolio that is managed by an individual. Both have the same average cost per share, they both have the same performance. An index fund is simply a portfolio that is constructed using passive investment criteria. These criteria are benchmarked against a selected set of underlying assets (bonds, stocks), and the portfolio is rebalanced and not actively managed.
- Your portfolio will be diversified.
“Diversification is the key to your portfolio” is one of the most widely used investing cliches. And while it may be true, it doesn’t make diversification easy. The key to a diversified portfolio is creating low costs, and not just in terms of commissions and taxes. The truth is that if you’re investing in a diversified portfolio, it’s likely you’ll be paying very little in management fees and taxes.
- Your portfolio will be low cost.
Like a stock index, a low-cost ETF (exchange-traded fund) tracks a broad index of stocks, providing investors with the diversification and tracking benefits of an index without paying high expenses.
- You don’t need the latest computer program to invest in.
You don’t need the latest computer software to invest—and that’s a good thing. These days, you can do your research on the Internet and pick the funds you want to buy and sell without needing to get a degree from your local college or university. (Many brokerage firms now offer “online stock trading,” which is a way to buy or sell stocks without going to a typical brokerage firm.)
- You don’t need to invest a large amount of money.
If you are looking for the best way to protect your investments and maximize your return, you might consider indexing. While index funds are not the only way to invest, they are the best way to invest over time.
There are a lot of ways to invest in the stock market. Most people think of traditional stock investing and mutual funds when they think of investing. Still, index investing is a way to invest in the stock market that many people often overlook. Index investing can be done by anyone, and it is a great way to become an index investor.