With the rising popularity of index funds, its no surprise investors are taking advantage of these low cost investment instruments. And with an Index Fund’s makeup being closely related to that of a mutual fund, many investors are starting to take notice of the benefits of investing in index funds for retirement.
What is an Index Fund?
An Index Fund is a passively managed fund that mimics a particular stock market index (a way to measure a section of the stock market). It does this by holding a portfolio of stocks in the same proportion to their weight in the desired market index.
Investing in index funds for retirement, instead of mutual funds, is a great option to grow your wealth.
Pros of Investing in Index Funds For Retirement
- Low Cost
- Tax Benefits
- Diversified – Reducing Risk
Index Fund vs. Mutual Fund
The S&P 500 Index is one of the most common types of index. Mutual fund Managers trying to match the return of the S&P 500 Index will buy stock in companies included in the S&P 500 Index – In this case the 500 largest publicly traded corporations in the United States. By investing in these companies managers can build a diversified portfolio of stocks that they hope will get a return close to that of the S&P 500 Index’s return.
Make sense? Here’s the difference:
Mutual fund managers will try to buy and sell these stocks in attempts to beat the S&P 500 Index return, while an Index fund will simply buy and hold a portfolio of stocks in the same proportion to their weight in the market index to closely match its return.
Although you can’t predict what the stock market will do, mutual fund managers will try to buy low and sell high to get you extra returns. This task is actually a lot harder than it sounds and most managers end up missing out on huge gains because they sell the stock too early.
An Index fund believes in a long term investing strategy, relying on the average market return as being the optimal market return. And with less than 20% of mutual fund managers actually beating their benchmark index return, what are the chances you’ll pick the one that does?
Replace your mutual fund investing strategy by investing in index funds for retirement instead!
Why Investing in Index Funds for Retirement is Better than Mutual Funds?
- Would you rather pay high fees or low fees to own the same portfolio of stocks?? That’s what I thought! An Index Fund is a diversified portfolio of stocks that can be owned with low expense fees. These stocks are the same stocks a mutual fund manager would buy to build a diversified portfolio.
- The real impact driving your return is the amount of fees you’re being charged. Higher fees cause major drains on your investment. The average annual expense for a mutual fund is 1.3%, that’s a 1.3% decrease in your return every year! Index funds can be as low as .09%.
- If your mutual fund manager tells you they will aim to get you the same return as the S&P 500 index, they really need to beat the index just to cover their fees! And as I stated before, less than 20% of mutual fund managers beat their benchmarks.
- With the combinations of high fees and lower portfolio returns while owning a mutual fund, shows that investing in Index Funds for retirement makes sense.
- If you invest in a index fund your annual expense fee can be as little as .09%! This extra return on your investment adds up and in the long run you will make thousands of dollars more!
- Too many mutual funds have 5.75% sale charge just to get into the fund, that’s $575 that the financial advisor gets instantly if you invest $10,000 with them. Add this fee along with the annual expense fee and you can see why an Index Fund starts to seem like a good idea!
- Most importantly, Index Fund’s, such as the S&P 500 index, have outpaced the average equity mutual fund’s return year after year. Numbers don’t lie! The gap between the S&P 500 Index return and an equity mutual fund’s return tends to be closely related to the higher fees associated with mutual funds. Makes sense!
Want to Know What Fees Your Current Mutual Fund Charges You? You Might be Surprised! Check Out My Article Showing You How to Find These Fees – Mutual Fund Fees: Are You Paying Too Much?
So Why Doesn’t Everyone Invest in Index Funds?
Although index funds have been rising in popularity, many people still don’t know what they are. One reason for this is because financial advisors don’t offer them. Why not? Simple: They can’t make any money from them! The low management fees, and lack of a sales charge leave no room for a financial advisor to get their management cut. This is why it’s important to learn about, and take advantage of an Index Funds.
Another reason people don’t invest in index funds is because they usually require a higher initial investment. This may be a problem for some people, although it’s worth saving up the extra money to get into the fund. And with no sales charge and low fees, you know your whole investment is getting invested right away.
Cheapest Index Funds
- Schwab S&P 500 Index (SWPPX)
- Fidelity 500 Index Fund (FUSEX)
- Vanguard 500 Index Fund ETF Class (VOO)
- Vanguard Total Stock Market Index Fund ETF Shares (VTI)
Here’s a small list of some of the most popular and cheapest index funds around. You can buy the cheapest index funds, along with other investments options, by opening up an online brokerage account. Learn how here!