Index Investing

Personal investing isn’t the sexiest or funnest topic to discuss; however, it’s a very important topic. Before sharing my thoughts on the topic of index investing, I want to make one thing perfectly clear: I’m not giving financial advice. I’m not a financial advisor. I’m simply a guy who loves to read a lot, decided I should invest my own money, and set about learning how.

During my learning curve, Common Sense on Mutual Funds was the most helpful book I read. If you get something out of the rest of this post, you may want to give it a read.

Index investing is simply choosing index fund(s). Index funds are usually a large group of securities picked by a broker or a team of brokers. Unlike traditional mutual funds, index funds aren’t regularly updated. This means the securities in index funds don’t often change. The benefit of the lack of day-to-day management is smaller fees. When it comes to investing, reducing fees matters for two reasons:

  • As your investment grows, whether we are talking about traditional mutual funds or index investments, you pay more in fees. This is because fees are a percentage of your investment.
  • Every dollar spent on fees is one less dollar left to invest.

So, investors lose money both in what they pay to have their investment managed and on what that money would have earned if it had been invested. By choosing index funds, you can dramatically reduce fees; for example, when someone else was investing my money, I was paying two percent. Now, I’m paying about .04 percent. If I made other choices, I could pay even less.

When I was choosing index funds, I wanted a diversified plan. So, I chose as the centerpiece of my investment a total stock market index fund. This means that I’m through the fund, invested in more than 1,500 companies. By way of contrast, there are only 30 companies on the Dow Jones. By choosing a total stock market index fund, I’m significantly more diverse than I would be had I invested in a Dow Jones fund or a fund that tracks the S & P 500. Sure, my main fund may not go up as quickly as will the Dow Jones during a rush, but it won’t drop as quickly during a down period. This is because there is almost always a segment of the stock market that is gaining.

I have been invested in two index funds and a traditional mutual fund that I had to be in for my ABLE Account since the middle of January. So far, my index fund investments are outperforming my ABLE Account (which is professionally managed). If you do your research, you will see that index funds have a strong history of outperforming traditional mutual funds.

If you found this useful, let me know. If I didn’t explain it well, let me know that too. I am thinking about other personal finance topics to discuss. So, I would like to know if I’m giving you information that makes sense.

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