{"id":7350,"date":"2014-01-24T11:34:57","date_gmt":"2014-01-24T19:34:57","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=7350"},"modified":"2016-12-21T07:28:12","modified_gmt":"2016-12-21T15:28:12","slug":"investing-basics-index-funds","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/investing-basics-index-funds\/","title":{"rendered":"Investing Basics: Index Funds"},"content":{"rendered":"

Consider the problem facing most retail investors. They have to buy a company, hopefully at a price lower than the firm’s value, then sell it at some future date to someone who will pay a premium.<\/p>\n

Troublesome as that is, it gets worse.<\/p>\n

Aside from the opacity of even public firms, our investor must also take into account irrationality among other investors.\u00a0Regulation\u00a0comes into play, as well as pressure from competitors.<\/p>\n

\"512px-Wall_Street_(5899300483)\"<\/a><\/p>\n

To top it all off, the retail investor must go through the markets to buy and sell, paying a toll in the form of\u00a0trading commissions<\/a>. Dividends partly recompense us for the effort, but those can be cut.<\/p>\n

No wonder we tend to shrink from so grand a responsibility.\u00a0Wall Street\u00a0knows we cannot focus on the minutiae of\u00a0investing, so it came up with the mutual fund concept: Give us your cash and we’ll worry about pricing and competition and even deal with the trading costs.<\/p>\n

It will all be wrapped up in a small fee, so small you might not even notice.\u00a0Except\u00a0the fee is not small<\/a>. Mutual funds charge, all in, around 1.44% for equity funds and 1.02% for bond funds. Some emerging market and alternative funds are 2% or higher, according to the Investment Company Institute.<\/p>\n

Fee impact<\/strong><\/h2>\n

Let’s say you average out to 1.5%, which is a typical experience for a portfolio of funds and doesn’t count whatever extra you voluntarily pay a financial advisor.\u00a0The impact of that 1.5% on your return is enormous, between one-third and one-half of the potential gain over 20 years of saving and\u00a0investing.<\/p>\n

Worse still, you aren’t likely to get any upside. Most mutual funds have trouble keeping up with their own benchmarks, much less beating them. The S&P 500 regularly bests 70% of actively managed equity funds. Bond funds do even worse.<\/p>\n

Index funds solve all of these\u00a0investing\u00a0risks<\/a>\u00a0in a single shot. Here’s how:<\/p>\n

1. Stock selection<\/strong><\/p>\n

First off, you no longer have to pick stocks. An index fund by design owns all of the stocks or bonds in a given index. It uses computers to buy, sell or hold assets in accordance with the market itself. If you own an\u00a0index fund<\/a>\u00a0of the U.S. broad stock market, say the S&P 500 or the Wilshire 5000, you own all of those companies.<\/p>\n

2. Cost<\/strong><\/p>\n

Index funds in the form of\u00a0exchange-traded funds (ETFs)<\/a>\u00a0are rock bottom on pricing, as low as 0.04% but often in the vicinity of 0.05% to 0.07%. The pressure is on the big brokerages, too, to cut commissions to zero in order to attract clients. Win-win, as they say.<\/p>\n

3. Performance<\/strong><\/p>\n

You get the return of the index, minus a minuscule fee to keep the computers running and your investments in line with the market. The result is a consistent return, one you can bump up by owning a\u00a0balanced portfolio and periodically rebalancing<\/a>\u00a0among asset classes.<\/p>\n

Increasingly, index funds are a powerful tool that even beginning investors can use to ensure that they retire on time with little stress. You don’t need to beat the market. You just need to keep up, keep costs down and make as few mistakes as possible.<\/p>\n","protected":false},"excerpt":{"rendered":"

Consider the problem facing most retail investors. They have to buy a company, hopefully at a price lower than the firm’s value, then sell it at some future date to … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":7351,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[7],"tags":[62,42,43,37],"yoast_head":"\nInvesting Basics: Index Funds | MarketRiders<\/title>\n<meta name=\"description\" content=\"Index funds solve a raft of investing risks in a single shot. 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