Power of Index Funds
"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." – Warren Buffett
Portfolio allocation requires you to decide which investments comprise your portfolio. This depends entirely on your age, income, and risk appetite, but there are essentials. Low-cost index funds/ETFs create portfolio diversification and also great returns over the long run. Specifically, an index/ETF that tracks the S&P 500.
The S&P 500 index funds track the index and provide investors with exposure to the 500 largest U.S. companies. History has shown that index funds outperform individual stock picking by 95% over a 20-year period. Furthermore, after 10 years, 85% of large cap funds underperformed the S&P 500, 15 years, 92% of funds underperformed the S&P 500.
This investment strategy has the approval of legendary investor Warren Buffet who stated, “For most people, the best thing to do is to own the S&P 500 index fund.” He was also optimistic on the future of American growth in his FY 2020 annual shareholder letter.
In today’s markets, it is so hard to beat the market. Everyone has access to so much information that can be overwhelming. Investing in a fund that tracks that S&P 500 has shown that this earns you, on average, 7% per year. In other words, you will never make a killing, but you won’t get killed.
This method can also teach you a valuable investing technique, which is sometimes the best thing to do is nothing! Having a strategy of putting your capital in an S&P 500 fund permits you to enjoy compounding interest and avoid the stress of picking individual stocks and dealing with the volatility.
Having this buy-and-hold strategy is a great way for investors to prepare for retirement. Sometimes boring can be beautiful!
One of the pitfalls of index funds historically has been the cost associated with them, otherwise known as expense ratios. However, these have ultimately been reduced to be about 0.5% - 0.75%. In some cases, specifically for passive index funds, this expense ratio can be as little as 0.03% ($VOO is a great example).
With all the hype that surrounds investing in individual stocks, you can forget that dollar-cost averaging over the long-term is still one of the best investment strategies. Investing money in your 20’s & 30’s over time will grow to a substantial amount that can be used in retirement.
Investing is hard but there are investing vehicles with a track record that you simply can’t dispute. Give yourself the opportunity to capitalize on the growth of America and earn a great return doing so.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.