Index Funds are an excellent tool in any young investors tool kit. They provide continued, proven growth over long periods of time, and that’s all any passive investor can ask for. Most of the fees for accounts like these are very low, and they bring attractive returns that will help you compound earnings effectively. The best part about index funds is that there are so many different kinds of them to choose from. There’s one out there for pretty much anyone.
For those who don’t know, Index Funds are a passive investment you can find on any brokerage website. They are basically a fund that invests in hundreds of companies, in small percentages, in order to create one large fund of equity. As the market goes up or down, so does the fund. It’s extremely safe because if one company fails, it’s only a small (~.25%) part of the fund and you’re investments will stay relatively intact. Most funds follow one of the major indexes like the Dow Jones or S&P 500. This way it’s easy to see your growth, because you can go to any news channel and see exactly how much that index went up or down, and that corresponds with how your investment did that day.
The kinds of index funds I’d like to talk about are Large Cap Index funds and Total Stock Market Index funds. ETFs (Exchange-Traded Funds) or index/mutual funds have exploded in popularity over the past 10 years. It used to be you could pick basically any index fund with a proven track record and make attractive gains; not in this day and age. There are too many funds that implode or lose money every year to put it to chance. The best ones have a proven track record of making money, and have a good blend of small, medium, and large cap companies in order to provide a good risk/reward ratio.
Large Cap Index funds are an attractive investment because they consist of many companies with proven records of growth. These companies don’t have the highest returns, but they are safe and will grow with the market. Most of the large cap index funds also include some medium and small cap businesses in order to increase their growth which increases your investments. Some popular large cap companies in almost all large cap index funds are: Apple Computers, Microsoft, Pfizer, Exxon Mobile, Johnson & Johnson, and GE.
Total Stock Market Index funds literally track the exact same stocks that are in the popular stock indices. For instance the Schwab Total Stock Market Index Fund (SWTSX) follows the Dow Jones Industrial Index. It has all 3600 companies in the fund, and as the market grows, it grows with it. Thankfully the track record of the US economy shows a consistent upward trend, and that’s positive for all investors.
Personally I suggest index funds as the major source of investing for any young investor. Not all of your budgeted savings have to go into passive index funds, but they provide a low risk, consistently attractive approach to investing. Some studies have shown that only 3.8% of mutual funds beat the market over 10 years. When you can’t beat them, join them right? Why invest in actively managed (mutual) funds that have a 4% rate of doing better than the market, when you can invest in an index fund that is literally the market itself. You don’t have to do anything with it other than put your money into the fund, and watch it beat all of your parents and older relatives who have their money in actively managed mutual funds. That is the inherent beauty of index funds. You don’t have to do anything except watch your money grow.
Once again, these are all my opinions, but I feel very strongly about index funds, and their value in the market. If you have ANY questions or comments, feel free to contact me at David.Coleman@collegeinvestr.com or leave a comment on this post! Thanks for reading!