10 reasons I invest in index funds
Regular readers know most of my portfolio is invested in traditional low cost, highly diversified Index Mutuals and ETFs. I’m talking about funds like the Vanguard Fall Stock Market Index Fund (25% of my retirement portfolio and 100% of my HSA Index portfolio) and 50% of my 529 portfolio). I have small portions of my portfolio dedicated to things like bonds, small value stocks, and real estate, but you won’t see any individual stock selection, market timing, or significant use of active management of publicly traded securities.
A few years back, I was looking for an old post about index funds to link to and realized I didn’t have one. So, this is one of those gaps in the background. If you already know the dominance of index funds, feel free to move on to something else on the site. If you haven’t read yet, this post is for you.
Top 10 reasons to invest in index funds
#1 Better performance
This is the main reason I use Index money as the main building blocks of my portfolio and the main thing I look at in those small parts of the portfolio when I think of doing something different to index. The empirical data is clear on this. Buying individual stocks (or bonds) introduces asymmetric risk, that is, the risk that you were not compensated enough to take it. This is the risk of the company going through bankruptcy or borrower failure or downgrading. This is when an individual security goes down in value when the overall market goes up, and it happens all the time to people who buy an individual security. This does not happen to me, however, because I invest in mutual funds. Mutual funds offer you wide diversification, consolidated fees, daily deposits, and professional management – all for very low fees.
You can get those specific benefits with a well-managed mutual fund and index fund. However, details on active management vs. Comment management is clear, too. Time and time again, it has been shown that effective management does not work well enough to overcome its additional costs, especially in the long term and more on the tax account. Over 10 years, the index fund outperforms 80%+ of its peers. When you find your 30-60 year investment portfolio and look at all asset classes in your portfolio, the Full Index portfolio, from 99% of underperforming portfolios, is perfect.
If you invest in index funds over time, you can expect higher returns than those who choose stocks or mutual funds.
# 2 Eating less time
Another important reason I invest in index funds is how long it takes to invest this way. While I have to spend more time on my portfolio to manage the ongoing important contributions, I manage my parents’ portfolio-an Index-Fund that pays in an hour. Serious. An hour. That’s all. What are we doing at that hour? We serve them and release their small distribution. And the initial setup didn’t take much longer than that.
When you invest in index funds, you don’t have to spend any time researching the following stocks or companies. You didn’t watch CNBC. You don’t read Forbes or the Wall Street Journal. You don’t have to, because it won’t change anything you do. Besides, you will see all this information is completely forbidden; You realize that it’s just boring that it’s boring when you could be doing something else with your life. We invest to survive; We don’t live to invest.
Here is another problem. Most stock pickers or mutual fund buyers do not extract their time value from their portfolio. For a professional who earns a higher income, that cost is not covered. In fact, it could be your highest cost investment. Even if you manage to beat the market in one year, the odds of what you make after accounting for the amount of time you lost doing it are pretty darn low. You wouldn’t do better to do another procedure, read more slides or CTS, or see a few more patients. “But I’m enjoying it” is not an excuse, especially if you’re not only spending time on it but getting low performance (see #1) to begin with. I’ll bet there’s something else you enjoy more, though.
More details here:
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# 3 dangerous pile
You get to avoid taking big risks with individual safety, and you also get to avoid manager risk. This is the risk that your boss is stupid or makes a mistake or retires. “But Warren Buffett is brilliant!” Yes, but you also die, just like every other money manager out there. (And he recommends investing in index funds rather than BERKSHIRE mutual funds. By the time you find that, it’s often enough. Also, it takes time to manage managers.
# 4 low cost
Costs matter, and in the long run, they matter a lot. The main reason Sexpector FentPerform Enterform Mutual Funds is that they have very low costs. You avoid the burdens of a 12b-1 compliant fund. Your average expense ratio is likely to be only 1/10 that of a tightly managed fund (0.02%-0.2% vs 0.5%-2%). There are hidden costs such as commissions and BID-Ask spreads from highly regulated high income. And of course, there’s your highest cost: the cost of your time selecting and looking at a portfolio of managers.
# 5 Tax Effectiveness
An Index Fund portfolio typically operates at a higher rate than a strictly managed portfolio. Income is low, so there are few distributions of interest income – especially with a diversified index fund, such as total market funds. The only time these funds have is when there is an initial public offering (no distribution of money (no distribution of money received) or when the company is exposed to change (again, no distribution of capital). In reality, the profit should be 0%. Actually, it is about 4% for various technical reasons. That means that the average stock is held for 25 years. Thinking about the average sutual Fund Profit is 85%, holding its common stock just over a year means 4% is basically 0%.
Capital gains are also reduced by the fact that you don’t have to change the money every few years when the fund manager retires or loses Toucha.
More details here:
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# 6 Simple portfolio building blocks
One of the best aspects of an Index Fund is that it simplifies the portfolio construction process. If your investment policy statement calls for 5% of the portfolio in RIFS, you can simply invest 5% of the money in the Vanguard Reit Index Fund. Done. Do you need international shares? Enter the international fund. Corporate bonds? There is a fund of Corporate Bond indices. No drift style. No worries about overlapping and other holdings. You know what is in the bag by reading the name of the bag. Sometimes I think it’s amazing that anyone would pay thousands of dollars a year for someone else to build a portfolio for them when it could be that easy.
# 7 Wide availability
I can buy my favorite index fund, Vanguard Index Market Index Fund, from my 401(K), our life savings account, 529 roths, our children’s ugmas, our children’s roth, and our tax account. It’s part of the portfolio in our defined benefit partnership, too. Even my old 401(k), TSP, has the same fund. It’s as universal as it comes. You don’t need to get a separate mutual fund for every investment account. And even if I didn’t have access to Vanguard funds or a stock market fund, my chances of being able to access an equal fund from fidelity, schwab, or at least the 500 index) are low and getting lower all the time.
# 8 hold market shares
L LOVE that index money has convinced me that the market is coming back. If the market goes up 8% in one year, I get 8%. IS & P 500 Index is up 1% today? So is my bag. No worries about tracking error. Beating the market is very difficult, and most of them try to end up failing (and failing miserably). For those who are successful, they usually do very little. But matching the market? Nah, that’s easy.
# 9 no accidents features
Total sales vs. Factor deformation debate will continue for years. Most of the time, you can use a low index fee for the approach. But one nice thing about the value of the market circuit is that you can believe that they break down the sectors and things. If small stocks do well, you own them. If value stocks do well, you own them. Low volatility? Look. The momentum? Look. Any other existing or industry you can come up with? You own that, too. You don’t have to worry about the feature being found and bid and running down.
More details here:
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# 10 reduce regrets
I’m holding an apple before it’s topped. I went downstairs. It’s the same with all the other top emerging stocks out there. Sure, I own a lot of losers, too, but I’ve never worried about losing a stock increase. That helps me control the most important thing in my portfolio: My own behavior.
There are many roads to Dublin. If you build the right portfolio, pay enough, and manage your behavior, you are more likely to reach your financial goals. But for whatever part of your portfolio you invest in stocks and bonds, do yourself a favor and use an index fund.
WHAT DO YOU THINK? Do you invest in low index funds? Why or why not? What do you like about them? What don’t you like?
[This updated post was originally published in 2018.]
