Benefits Of Index Investing
Investing in index funds has long been considered one of the smartest investment moves you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over time. Historically, index funds outperform other types of funds that are actively managed by top investment firms.
For example, in 2007, Warren Buffett made a $1 million bet that an S&P 500 index fund would beat the returns of an actively managed hedge fund over ten years, which he won comfortably.
Buffett’s victory may be reason enough for some investors to start adding index funds to their portfolios. However, if you need more convincing, the financial experts at Westgroup Financial Management Inc. have listed some of the benefits of investing in index funds and explained why they are so popular.
One of the primary benefits of investing in index funds is that your portfolio becomes instantly diversified, minimizing the likelihood of losing some or all your money. Take an index fund that tracks the S&P 500, which holds about five hundred different stocks. While the performance of each of these stocks is likely to fluctuate over time, diversifying your portfolio among multiple companies ensures that the value of your portfolio is not overly linked to the fortunes of any one company listed in the index.
2. Low costs
Another significant benefit of investing in index funds is that costs, including taxes and management fees, are generally lower when compared with other types of investment funds. You see, actively managed mutual funds have expense ratios that often range between 1% and 2%. Most of that fee pays for portfolio managers to make buy-and-sell decisions in an attempt to outperform the overall market. Index funds, by contrast, are passively managed, bringing down the expense ratio as there’s little work required of the index fund’s manager. Similarly, index funds offer lower turnover ratios and considerably lower taxes on capital gains.
With our busy lives, nobody has time to constantly watch the market, analyze companies’ financial statements, and worry about investment portfolios every day. Index investing lets you automate your investing, so you build wealth while you’re busy living your life. It also allows you to develop a simple investment plan that is easy to implement and easy to stick to over the long term.
4. Attractive returns
Finally, individual companies both outperform and underperform the market, but, in general, the overall stock market increases in value over time. As a result, index funds generally yield high returns for low cost, making them an excellent value investment.
At Westgroup Financial Management Inc., our goal is to exceed your expectations. As the go-to experts for all financial planning and investment, you can feel confident in finding the best solutions to meet your financial needs. Our team is highly committed to ensuring your success through a calculated strategy. We provide services in the Province of British Columbia through our several offices in Vancouver, South Surrey, Langley, and Greater Vancouver Area.