What were going over today could very well be (and should be) the cornerstone of your investing portfolio.
This special investment has been created to perform unlike any other type of investment. They truly enable the independent investor to confidently contribute their money to an investment with substantial growth over a designated period of time. Index funds are the backbone of my investment profile and ill show you exactly why they should be a huge part of your “risk bucket” as well.
Lets get into it.
Why Should You Invest in Index Funds?
One of the biggest mistakes any investor can make today is developing the notion that they are skillful enough to beat the market on a consistent basis. Yes, there are those investors out there who possess the legendary skills of sniffing out the best investments and deals, however, even the legendary investor Warren Buffet says,
“Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.”
Even the legendary investor Warren Buffet can’t time the market on a consistent basis. The stock market consistently participates in wild upturns and downturns that can never be predicted by the average man. Especially if you’re goal in life is just to be financially sound, not the next “Warren Buffet”.
Index Funds are a way that you can create a passive investment that you can be CONFIDENT in for years to come. Once you make an investment on an index fund, you allow the fund to manage that investment for you. This can be really nice especially because you are growing WITH the market instead of trying to BEAT the market.
How do Index Funds Work?
Index funds consist of many different types of investment opportunities. In its most basic form, an index fund is an investment on a fund, like a Vanguard or Invesco ETF, that tracks the performance of a specific group of targeted stocks.
Imagine a basket is given to you and consists of the top 100 tech corporations in the stock market. These top 100 stocks continue to grow and mirror the market in a targeted sector of the market.
Pretty cool right? John Bogle, the creator of Vanguard, has pioneered a way for the common investor to get around paying expensive fees for a mutual fund that has high transaction fees, and has created a way for the average investor to simulate the market with low fees.
Not to mention, remember those top 100 tech stocks I mentioned? Any time one of those stocks isn’t performing the way that it’s supposed to, it gets subbed out for another stock which is performing at a higher level.
Talk about a passive investment!
What this means for you as an investor.
It means you have finally found a way to find an investment with great term capital appreciation (growth over time) and have simultaneously eliminated emotional investing!
How you ask?
Because an index fund simulates the market, the index funds are constantly rising over the long term. Yes the market has its depressions and recessions, these are inevitable. But if one looks at the performance over time, the stock market since it’s birth has always bounced back. Statistics show that the S&P 500’s return rate for the last 20 years has been 11%! That’s 11% that you are very likely to participate in. Not to mention, the S&P consists of stocks that aren’t sector specific. Targeted index funds that specialize in a specific sector eliminate underperformers unlike the market!
To add, index funds are extremely DIVERSE. Because these investments consist of so many different companies, you are not only making an investment on those tech stocks we talked about earlier, you’re making an investment on likely dozens of tech stocks!
Index funds are the ultimate tool for any investor and should be the cornerstone of your portfolio! The diversity and the steadiness of index funds allow for any investor to participate in their gains.
Thanks again for all of your input on the blog and if you have any further questions about index funds or any financial topics, don’t hesitate to reach out! Your input and interaction is highly appreciated!
Andrew Martinez, owner and writer of Minerva Money
YouTube: Andrew Martinez