We all remember the story of the tortoise and the hare. It was in this tale that we learned a valuable lesson: slow and steady wins the race. The tortoise was not a glamorous creature and he may have lacked pizazz, but in the end, he won.
In a way, index funds are the modern-day tortoise in the race for a solid investment plan. Nothing flashy, just steadily keeping pace with a particular index, and if, by chance, that index does well, then the fund excels also.
Index funds, which are a type of mutual fund, are a pretty simple concept in the world of investments. In an index fund, stocks are grouped together from companies included within an index, for instance the S&P 500 or the Dow Jones Industrial Average. The percentage of stock is kept the same as the indexes themselves in an attempt to mirror the index. While it’s a rather basic concept, it’s one that for some has proven to be successful over time.
The Dow Jones Industrial Average (DIJA) is a price weighted index of 30 of the largest, most widely held stocks traded on the New York Stock Exchange. The S&P 500 is an unmanaged group of securities considered to be representative of the stock market in general.
Whether or not you want to invest in an index fund depends on the type of investor you are. Each person has a distinct style and keep in mind that index funds are different from normal mutual funds.
Most mutual funds are actively managed so a fund manager is constantly picking new or different stocks to go into the fund. This active attempt to beat the market is based mostly on timing and choosing the right stocks and bonds. This can sometimes pay off. Other times it does not. Index funds, on the other hand, are a passive investment meaning they are not actively managed.
But one of the most attractive parts of index funds stems from the lack of active management. Because they don’t require the same constant administration and attention as an actively managed mutual fund, their expense ratios are generally lower.
Some say if you can’t beat a market, you might as well join it which is one of the biggest attributes of an index fund. The funds are great for people who wish to follow the market.
So are index funds for you? That depends on your investment style. As always, you should check with a financial professional before investing, and decide if index funds fit in with your overall investment strategy. But in the end, index funds offer an alternative way to potentially increasing your wealth and achieving your financial goals.