If you’re after a no-fuss and stress-free way to invest, index funds are the best way to go. It will likely be one of the easiest and smartest investments you will ever make. People are always talking about how good index funds are, and they aren’t wrong.
They are a simple, user-friendly, and hands-off way to invest in the stock market, and they are also very low-cost compared to many other options. They are passively managed and have significantly lower fees as opposed to actively managed funds. The Motley Fool is a great investing advice company that will be able to help you out along the way.
They also often generate higher investment returns. The best bit is, they are very easy to buy which is just another reason that they stand out above the rest.
Things to keep in mind
Index funds are becoming more and more popular among Americans and are one of the most popular ways to invest because of the fact that they are so user-friendly and low-cost. On top of that, they are being favoured for their instant diversity and their great returns that usually beat accounts that are actively managed. Some other things you need to keep in mind include:
- Do you want an index fund that is far too expensive? – Try investing in an ETF (exchange-traded fund) that tracks the index. This will mean that you are just purchasing a slice of the fund.
- Is the index fund doing its job? – Your index fund should be mirroring the performance of the underlying index. Don’t panic if the returns are not identical.
Pick an index
When you have to pick from a plethora of index funds it can be fairly daunting. You may not know where to start, so let us help you.
- Returns – An index fund is only as good as the index it is representing, minus the fund expenses. It is expected that stocks will return more bonds in the long run with far greater volatility.
- Look at the bottom line- You will find a good number of possibilities even though all funds are fairly similar. You have to make sure you compare annual operation expenses and immediately rule out load funds.
- What type of investment do you need for your portfolio – If you are after long-term growth, you will want stocks. However, if you are after stability, you will want to choose bonds. Make sure to balance off your portfolio if you already have one or the other. M1 Finance is great because it allows you to create a fully customizable stock portfolio.
- ETF or index mutual fund – Though this isn’t an issue that is as prominent as the others, it is still highly important. You may be drawn to ETFs due to their lower operating expenses, however, they also cost money to buy and sell. ETFs are also more tax-efficient, but only slightly.
When it comes to buying, you can purchase your index fund from a brokerage, or you can purchase it directly from a mutual fund company. The same then applies to ETFs, they are basically mini mutual funds that trade throughout the day. When you are deciding on your index fund, consider these things:
- Trading costs
- Commission-free options
- Selecting a fund
It is highly important to remember that not all index funds are created equal and not all of them are particularly cheap. As with anything investing based, there are funds associated. The bottom line is that index funds can be an absolutely awesome investment strategy and they can be a great low-cost investment choice for all/part of your investment portfolio.