Index Funds: A “Genius” Investment Geared to Amateurs

Written by: David Wilkening

To paraphrase an old ad, when Warren Buffet speaks, everyone listens. But couple that advice with many experts who tout low-cost index funds as perhaps the best investment “amateurs” can make in the stock market, and what do you have?

Certainly, a winning combination and as sure a thing as you will find in the up-and- down stock market.

Buffet, who needs no introduction except as an investment genius, is quoted as saying:

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals.”

Stock market experts (who are perhaps less well-known but perhaps as successful, though without billionaire Buffet’s fame) also routinely recommend Index Funds.

Why is that and why do so many experts cite the genius of investing in low-cost Index Funds in the Stock Market?

Low fees are not the only advantage here.

Reasons:

—They’re simple. You know exactly what you’re getting. As the name implies, index funds track a particular index or stock market benchmark. The fund holds everything or at times a typical sample of the stocks in the index. Nothing more complicated except at times a little cash to accommodate redeeming shareholders.

—Fees are much less (as Buffet has said) and may represent just 0.25 compared to 1 percent or more. For investors of all types (including particularly retirees), fees on actively-managed funds can drain investments over a long-term period. That money would have been better used for retirement needs.

—Another advantage of owning index funds is that it allows you to stay committed to your investments. That’s the case regardless of long or short term.

—Index Funds overall over the long run have been good performers. Investors don’t have to worry that each stock will beat the market each year.

—Investors by pass the so-called experts who advocate picking one stock or another. CXO Advisory Group analyzed the predictions  of 68 “experts” from 2005 to 2012. HGow often were they right? Less than half the time. This is about the same odds as flipping a coin.

—How much time do you want to spend studying the stock market? Speaking for most us (particularly retirees), not that much. If that’s you, a selection of index funds can be bought and held for years. No time limits.

Disadvantages are that you will probably never find a fund that is at the top of the performance ratings. You also give up your chance of beating the system (and bragging about it to other retirees or co-workers at your office). But remember that most observers say that Index generally beats roughly two-thirds of actively managed fund portfolios.

If you have to gamble (and some do it for thrills or for profit, no matter what) experts recommend taking 10% or so of your investment money for higher risk stocks or other investments.

Yes, this approach may be boring. But this strategy provides virtually worry-free long term results at a profit. And what more could amateurs ask? ###


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Index Funds: A “Genius” Investment Geared to...

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