Investing has a sexy side? Well, it’s not Lady Gaga sexy, but pretty close as far as the stock market goes.
Meet Mr. Strong, Silent and Profitable—a.k.a. the index fund.
What’s so seductive about index funds? Pour yourself a cool beverage and we’ll explain.
Most of the 8,000 or so mutual funds out there are “actively managed.” That means, a team of Wall Streeters are at the helm of each fund, deciding what investments to buy, etc.
An index fund, by contrast, quietly mirrors a broad swath of the market, or a certain market sector. (Several index funds track or follow the ups and downs of the S&P 500, for example.)
Index funds offer several advantages to ordinary investors, as contributor Galia Gichon wrote here.
- They’re a cheap date. Meaning: All mutual funds charge management fees, called the expense ratio. Index fund fees are far lower than managed funds. That means a lot more money in your pocket over the long haul. How much?
A 45-year-old with $20,000 in her retirement account would end up with about $70,500 at 65, assuming 7% in annual returns and 0.5% in fees. But if she paid 1.5% in fees during that time, she’d end up with only $58,400—17% less. Ouchy.
- They deliver the goods. Assuming you own an index fund for many years, you’re likely to see swings in its performance, but on average you’ll reap a steady profit, lower taxes (with no sweat on your part) and—after taking fees into account—most studies show that index funds deliver bigger returns, compared to managed funds.