There are two types of investors in this world – active & passive. An active investor believes he can achieve better returns than the market indexes, which track the overall market. In contrast, passive investors embrace market indexes, and thus want their returns to mimic the market; if the market returns are good, a passive investor’s returns will be as well. I am the latter type of investor. I believe that investing in indexes will have a greater long term return than investing with active management.
If you think you can actively manage your portfolio, you are brave. Beating the market is difficult enough for finance professional. But if you have no finance background, in the long run you will lose. Sure you might get in on a couple of good buys, but consistency is the key to success. And there are very few investment advisors that are able to maintain superior performance. So the odds are you will not either. You might not even pick your own stock, but rather invest in an actively managed mutual fund.
Mutual funds can be great for diversification. But you need to watch out for the mutual fund fees, advisor fees, broker commissions and other investment costs associated with it. Those fees can eat away at your return. How do you avoid that?
Investing passively can save you a lot of time and money. First, if you invest in a index you do not have to worry about reading up on an individual company or timing related issues (when to sell / or buy) . You can just buy and hold an index for the long haul. Second, index investing will include diversification without all the fees of an actively managed mutual fund. Because the investment will be tracking an index, there really is not much management going on; as a result, the fees are extremely low. I am talking about as low as .06% of your return. Finally, if you track a big enough indexes, like the S&P 500, then you can rest assured your investment will never be worthless. The companies the $&P 500 tracks are some of the largest in the world, and the world ended it is unlikely all of them would be worth nothing.
What do you guys think about investing in an index?
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