The Value of Index Investing

There are many ways to invest, and study after study has shown that the stock market provides superior long term returns than other forms of investing.

Not all stock market investments are the same however. Some stock market investments carry a great deal of risk, while promising equally great rewards. Other stock market investments provide a more reasonable risk/reward ratio, making them more suitable for the average investor.

One of the proven ways to invest in the stock market over the long run is to invest in a quality stock market index mutual fund. Mutual funds work by pooling the money of many small investors in order to buy a widely diversified basket of stocks. This allows small investors to buy a much more diversified portfolio, at a far lower cost, than those small investors would be able to achieve on their own.

Many mutual fund companies allow investors to start with quite a small investment, often as little as $1,000 or $2,000. For those starting an Individual Retirement Account (IRA) account, the minimums are often even smaller.

Another advantage of index mutual funds, besides the low initial investment requirement, is that such funds can have some of the lowest cost structures in the industry. Controlling costs like annual expenses is essential with a long term investment like a stock mutual fund, as those expenses will come directly out of the returns generated by that investment.

It is possible to find solid stock index mutual funds with expense ratios as low as 0.25% per year, while the expenses on many other stock mutual funds are often 1.25%, 1.50% or even more. It is easy to see why index funds are such a popular choice with cost conscious investors.

In addition to their low cost, stock index mutual funds have another important advantage over actively managed stock portfolios. That advantage has to do with taxes, and the distributions on index mutual funds are generally quite low. That means that the tax implications of holding such a mutual fund are generally quite low as well. Again, this is an important consideration with such a long term investment.

No matter what your investment goals, index mutual funds are likely to have a place in your overall investment portfolio. Whether the goal is to put the kids through college, buy a home or retire early, chances are a stock mutual fund investing in a major index like the Standard and Poors 500 will help you achieve your goal while minimizing both your expenses and your taxes.



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