Six ways they may help save your financial future.
Most people do not realize that index funds are one of the best investment tools out there. Although that tide is starting to change as investors have become more knowledgeable. Investors are taking notice that their traditional active money managers have been largely ineffective and they are looking for a smarter, more cost effective solution. Below are six reasons why you should consider investing primarily via index funds.
1) Index funds may add one to two percentage points to your annual return, without increasing risk. They can do this because they are a less expensive investment vehicle that is easier on the wallet. Less money paid to active investment managers means more money for you.
2) Index funds have very little turnover in their portfolios. This decreases trading costs and minimizes taxes by not incurring higher short-term capital gains tax within the fund.
3) Index funds will provide you with the full return of an asset class, less a minimal management fee. The fee is typically less than .20% and can be as low as .05%, depending on the asset class. In other words, at .05% it only costs $5 annually for a $10K investment. This provides protection from managers that are bad stock pickers and charge high fees for their service.
4) Index funds provide total control over asset allocation. If you want 15% of your money allocated to small cap value stocks, the goal is easily achieved. You won’t be subject to active manager style drift.
5) Index funds provide a high level of diversification. While diversification does not guarantee higher returns, it does guarantee lower risk.
6) Index funds help take the emotion out of investing. You suffer fewer cognitive biases using investment vehicles that provide market returns. Chasing the hot stock or manager is usually a loser’s bet.