subject: Investing In An Index Fund [print this page] This is the smart thing to do for investors because over time companies will collectively earn profits. The decision that needs to be made is whether you will try to identify the companies you think will be most profitable, will you hire someone to do this for you, or do you find a way to participate in the investment market as a whole.
Owning a portfolio is a way to participate in the market as a whole. On the opposite end of the spectrum, investing in individual stocks means you are picking one company to do well.
An index lets you pick tens, hundreds, thousands of companies and saying some of them will do well. With the right mix of mutual funds, you can come pretty close to owning all of the stocks that make up the market.
Although you will not know which stocks will do the best from year to year, it will not matter, as your investments will rise over time as businesses collectively make a profit. Owning a portfolio of index funds is like having a piece of all of the eggs in the basket.
There is no need to spend time and money researching each individual company, its transactions, and revenue history. An actively managed fund, on the other hand, has a staff of people conducting research in an attempt to identify the best publicly traded company stock.
Index funds have lower costs as they do not require a large staff, and expensive research. These lower costs, combined with the fact that active strategies are not able to consistently identify the winners in advance, make index funds the best value for most investors.
When the market goes down, the corresponding index fund will also go down in value. At this time you need to determine whether or not you think companies are forever doomed to keep losing money, and the market will endlessly go down.
On the other hand, you may think that companies will reorganize, and once again start making profits. When that happens, the market will once again go back up.
It helps to keep in mind that it would be nearly impossible to lose all of your money in an index fund, as that would mean every publicly traded company went out of business at once. If that happens, we all have bigger problems on our hands than our investments.
When you buy an index fund, you are really buying a basket of stocks designed to track a certain index, such as the Dow Jones Industrial Average or the S&P 500. In effect, investors who buy shares in these own shares of stock in dozens, hundreds, or even thousands of different companies indirectly.
Someone who invests in a portfolio is basically saying they know they be on the boat for every huge company, but they also won't have everything riding on a company that could crash and go out of business.
Instead, they just want to make money from corporate America by becoming part owner. Their only goal is to earn a decent rate of return on their money so it will grow over time.
Statistically speaking, 50 percent of stocks must be below average and 50 percent of stocks must be above average. This is why so many investors are so passionate about passive investing.
They do not have to spend more than a few hours each year looking over their portfolio. Whereas an individual investor needs to be familiar with a company's business, its income statement, balance sheet, financial ratios, strategy and more.
Although only you and your qualified financial planner can decide which approach is best and most appropriate for your own situation, as a general rule, index fund investing is better than investing in individual stocks. This is because it keeps costs low, removes the need to constantly study earnings reports from companies, and almost certainly results in being average, which is far preferable to losing your hard earned money in a bad investment.
by: Ronald Pedactor
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