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Investing in the stock market is not just for the super wealthy, and making even a modest investment of $3,000 can help you grow your wealth significantly over time. Index funds are awesome for stock market beginners partially because it takes some of the complications out of investing.
Why Index Funds Simplify Investing
Time Money describes an index fund as a list of investments—an individual or committee will sit down and list major publicly traded companies that are weighted by each stock’s overall market value, which helps determine how much “weight” each of these stocks carries in the portfolio. Essentially, index funds take into account the top few hundred companies that are alreadyperforming at a high level, and puts them in a single fund that individuals can buy shares of.
Rather than researching every single company that you think you might want to invest in, index funds present a nice mix of different companies, industries, and sectors. They also tend to balance each other out—so if one of the businesses in your portfolio takes a dip, the other stocks in your fund should balance it enough that it won’t hurt as much as it might have as a solo investment. And because index funds are made up established businesses, there’s less of a risk of the company going under and the stock values plummeting along with it.
But Are IndexFunds a Good Investment?
You might hear a lot about day trading, or about that one guy who invested in Amazon or Google back in the day and made a huge sum of money off of it—but remember, these stories are the result of pure luck. One of the risks of the stock market is that you can lose your money just as quickly as you invest it if you’re not making smart, well thought out choices.
But index funds are more than just a “safe bet.” Studies have shown time and time again that index funds typically perform better than manually managed stock portfolios. At the end of the day, index funds—and their growth over time—reflect the overall state of the stock market, and that is difficult to beat. The 2017 SPIVA scorecard, which monitors the performance of the Dow Jones Industrial Average, found that over a 15-year investment horizon,95% of finance professionals were unable to beat index funds with manually traded stocks.
Along with that, index funds typically charge a much lower annual management fee than active fund managers do, so you can keep more of the money that you make off your investments.
If you’re looking for a fairly safe, reliable way to grow the money you have over an extended period of time, index funds not only provide a simple way to do so, but also an effective one.