{"id":6020,"date":"2009-12-09T13:00:53","date_gmt":"2009-12-09T20:00:53","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=6020"},"modified":"2018-11-20T23:50:38","modified_gmt":"2018-11-21T07:50:38","slug":"index-funds-why-choose-anything-else","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/index-funds-why-choose-anything-else\/","title":{"rendered":"Index Funds: Why Choose Anything Else?"},"content":{"rendered":"
Like many other investors, J.D. and I are fans of taking the slow, sure path to wealth. We invest much of our money in index funds<\/a>. An index fund is a low-maintenance, low-cost mutual fund designed to follow the price fluctuations of a broader index, such as the S&P 500<\/a> or the Wilshire 5000<\/a>. They’re boring investments, but they work. (If you’re investing for the excitement, you’re doing it for the wrong reason.)<\/p>\n Because of their low costs, index funds have been shown over<\/a> and over<\/a> to dominate the majority of their competition. Yet many investors shy away from index funds with the reasoning that “the stock market is too risky for me.”<\/p>\n People seem to think that index funds are simply mutual funds that track the U.S. stock market. And that’s not particularly surprising given that S&P 500 index funds are:<\/p>\n But there are all kinds of index funds aside from those that track the S&P 500. There are bond index funds, real estate index funds, commodities index funds, international stock index funds, and so on.<\/p>\n In other words, you can create a thoroughly diversified portfolio using nothing but index funds<\/b>.<\/p>\n In fact, I’d suggest doing exactly that. By created a diversified, all-index fund portfolio, you’ll achieve a list of benefits relative to other types of portfolios.<\/p>\n Lower Risk<\/strong> By constructing your portfolio from index funds, you’ll achieve far greater diversification (and therefore be exposed to less risk) than you would if you constructed your portfolio from individual stocks and bonds.<\/p>\n Lower Costs<\/strong> It’s quite possible that you could cut your total costs by 1% or more. And while 1% per year may not sound like much, it can really add up<\/a> over an extended period.<\/p>\n Lower Taxes<\/strong> Added Bonus:<\/strong> Do you (like both me and J.D.<\/a>) have a portfolio made up primarily of index funds? If not, why? Is there a particular concern that’s holding you back?<\/p>\n","protected":false},"excerpt":{"rendered":" Like many other investors, J.D. and I are fans of taking the slow, sure path to wealth. We invest much of our money in index funds<\/a>. An index fund is a low-maintenance, low-cost mutual fund designed to follow the price fluctuations of a broader index, such as the S&P 500<\/a> or the Wilshire 5000<\/a>. They’re boring investments, but they work. (If you’re investing for the excitement, you’re doing it for the wrong reason.)<\/p>\n Because of their low costs, index funds have been shown over<\/a> and over<\/a> to dominate the majority of their competition. Yet many investors shy away from index funds with the reasoning that “the stock market is too risky for me.”<\/p>\n People seem to think that index funds are simply mutual funds that track the U.S. stock market. And that’s not particularly surprising given that S&P 500 index funds are:<\/p>\n","protected":false},"author":3347,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[492],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/6020"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3347"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=6020"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/6020\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=6020"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=6020"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
\nWhich sounds safer: Having the stock portion of your portfolio invested in 10 different companies, or having the stock portion of your portfolio invested in several thousand companies from more than 10 different countries? I know some people disagree, but to me it’s a no-brainer.<\/p>\n
\nBoth common sense and historical data<\/a> tell us that one of the best ways to improve investment returns is to reduce costs. Conveniently, index funds carry significantly lower costs than actively managed mutual funds. For example:<\/p>\n\n
\nIndex funds have much lower portfolio turnover than other mutual funds. (That is, they buy and sell investments within their portfolios far less frequently than actively managed funds do.) This makes them more tax efficient<\/a> than other mutual funds for two reasons:<\/p>\n\n
\nYou’ll understand what you own. With an actively managed mutual fund, you never know exactly what the fund manager is investing in. With index funds, it’s all out in the open.<\/p>\n