Investing in Index Funds

- Index Funds, simple for even the dumbest people

My job here is to convince you that index funds are worth looking into. I have tried to keep the information as accurate as possible during the time of publication.

Index funds are a type of mutual fund which tries to copy the performance of a stock market. The rationale is that the stock market generally goes up as a whole. This is also the "ultimate in diversification", and therefore takes away a lot of the risk.

"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money." Warren Buffett, one of the richest people in the world with a net worth of US$52.4 billion (2007)

Index funds work best for the investor who holds in the long run. These are the kind of investors who like to sit back and let everything happen.

"It turns out that simple buy-and-hold index investing is only of the best and most efficient ways to grow your money to the ultimate goal of financial freedom. Better yet, it comes with an enormous bonus of time. You don't have to spend countless hours learning about the complexities of investing. You don't have to spend more hours agonizing over what investments to buy or sell or when to buy and sell them, which means more time and freedom for you to do whatever you want and your money compounds on autopilot." Michael LeBoeuf, Ph.D., an internationally acclaimed business author, consultant and professional speaker

Serious chess. Serious fun!

Since it's so simple to manage index funds and computers do most of the work, there is no need to hire expensive fund managers or other researchers. Index funds therefore have expenses as low as 0.18%, compared to more than 3% for actively managed funds.

"The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of [the] American industry." Warren Buffett

Index funds delay capital gains taxes because there is no trading going on compared to funds with frequent trading. In addition, the money that would have been paid out in taxes can keep working for you.

Over the long term, the S&P 500 has beaten the returns of 80% of actively managed funds.

Seven reasons why no-load index investing is so effective.

1. There are no commissions. With a no-load index fund, you only have to pay a low transaction fee.

2. A major advantage of index funds is diversity. By tracking an entire market, you have the "ultimate in diversity", which is crucial in safe investing.

3. Index funds have extremely low yearly expenses. The costs of index funds can be as low as 0.1% and most are under 0.5%.

4. You don't have to worry about the fund manager. Index funds are not dependant upon the stock-picking competency of a manager.

5. Index funds takes the emotional component out of investing.

6. Index funds are very tax efficient. Since you own an entire market of funds, it is not possible to trigger a very large capital gains tax bill.

7. You don't have to pay a money manager to took a look at your investments.

"The main reason index investing is so successful is because fewer people have their hands in your pockets." Michael LeBoeuf

Bibliography

Woodard, Dustin. "Index Funds." About.Com. 2007. 21 Sept. 2007 <http://mutualfunds.about.com/od/indexfunds/Index_Funds.htm>.

Stempel, Jonathan. "Buffett: Index Funds Better for Most Investors." Reuters. 6 May 2007. 21 Sept. 2007 <http://www.reuters.com/article/fundsFundsNews/idUSN0628419820070507>.

"Warren Buffett." Wikipedia. 2007. 21 Sept. 2007 <http://en.wikipedia.org/wiki/Warren_Buffett>.

Spence, John. "Warren Buffett backs index mutual funds over ETFs." MarketWatch. 7 May 2007. 21 Sept. 2007 <http://www.marketwatch.com/news/story/warren-buffett-backs-index-mutual/story.aspx?guid=%7B4A899C35-02F6-42CB-BB01-7B7E303003D4%7D>.

LeBoeuf, Michael. Beat the Time/Money Trap (Audio CD). Nightingale Conant, 2006.

Posted by Proabffmm on Monday, December 31, 2007.