February 20, 2015 Admin | February 20, 2015 Index funds are great options when investing your money. Why? When buying one, what are you concerned with?
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Index funds are a great investment because that are well diversified. If you own one index fund you can own thousands of stocks at once. You should buy more than one index fund, specifically one with negative correlations that will do good when your other index fund is going bad.
When you buy an index fund like any other investment you need to keep these things in mind. What are the yearly costs going to be, for index funds try to keep them as low as you can, try for under .2% on the funds. You also need to look at how that index fund fits in with your portfolio, you do not want to double dip in some areas of the market. There is no reason to own an S&P 500 index fund and a total stock market fund at the same time. Index funds give you a very diversified mix of stocks and bonds in the funds making a portfolio well diversified. Even if you own index funds you want to make sure those index funds are diversified in them selves. Try to own the right allocation of stocks, bonds and REITS that give you an allocation you can be happy with. That allocation is different for every person and does not have a right answer that fits all. Something else to look at when investing your money is opportunity cost. You have to think about opportunity cost before you buy an index fund, if you want better returns you have to take some more risk, that is why an all bond or bond heavy portfolio has a high opportunity cost compared to a more stock alined portfolio. You need to look at your time horizon and why you are investing your money, if you want that money in a shorter time frame you may want to go with a bond fund but if you are in it for a very long time and have no reason to ever take that money out in the next 30 years you will likely want a stock fund or even an emerging markets fund. When buying index funds always look at them like you would any other investment and take in to consideration how they play in to your over all goals for investing.
Index funds are great options when investing your money because they have a low cost of ownership and no loads. They are also highly diversified and, when buying one, you should look to buy several different sets of funds that run counter to each other. This way, if one does badly, the other one(s) will still do well, allowing you to further diversify.
Many good answers in there everyone. Let’s recap.
(1) When buying index funds, never pay a load and never pay for an expense ratio above .3%. Strive to get that expense ratio down to .1% and you will be golden.
(2) Focus most of your portfolio on Total Market Index Funds. That would include the following Vanguard funds: Total Stock Market Index Fund (U.S. economy), Total Stock International Index Fund (most of the developed world), and the Total Bond Market Index fund (a large part of the government and corporate bond market).
(3) Break it down further by owning a REIT index fund, an Emerging Markets index fund, a small-cap value index fund, a large-cap value index fund, and maybe a short-term bond index fund and/or a total international bond index fund.
(4) Focus on wide diversification at the lowest possible cost as you load up your portfolio with negative correlated assets (they go up and down opposite of one another). Rebalance on occasion as needed. It really is that simple.
(5) Learn more by reading any book written by William Bernstein, Burton Malkiel, or John Bogle on the subject. A good starter book would be the The Little Book of Common Sense Investing by Bogle. Proceed on with A Random Walk Down Wall Street by Malkiel, and The Four Pillars of Investing by Bernstein. Awake to the possibilities!