Are you interested in a simple investment strategy that offers:
- Low cost
- Low risk
- Low maintenance
- Better performance than most actively-managed portfolios
If so, consider a portfolio of index funds. Investors can choose from hundreds of different index funds, each targeting a different sector of the financial market.
An index fund contains a representative sample of all securities in a certain clearly-defined segment of the market and will, therefore, track the performance of that market segment. Moreover, index funds have dramatically lower expenses than actively managed funds. A growing body of research suggests that indexes have historically recorded better returns than most actively-managed funds in the same class.
In addition to index mutual funds, indexes are also available as exchange-traded funds (ETFs), which have more trading flexibility, greater tax-efficiency, and generally lower expenses. Many investors use an index fund as the “core” investment in each asset class (large-cap, mid-cap, small-cap, etc.), then supplement the indexes with select managed funds or individual securities that may have upside potential.
