Why I Continue To Advocate For Index Funds
Stocks can form a tremendous anchor to anyone’s portfolio, and over the long term, can produce returns that are far ahead of inflation.
Investors looking to get into the stock market will no doubt be aware of this. Most pension funds, private and corporate use
There are some big caveats to that statement though - individual stocks for example can fail spectacularly and if a company collapses it’s quite likely your investment will be gone. Picking the right companies is hard work. Traditionally people went to fund managers to pick stocks for them, wrapping many together in mutual funds. However in recent years the fees of managed funds and their performance (less than 5% beat markets in the medium to long term) have come under scrutiny, and more and more people are seeing the value in much lower fee index funds as a good anchor for their share portfolios. Even Warren Buffett advocates them, and he certainly knows a lot more about investing than most of us.
The days of only holding a managed fund portfolio on an expensive platform with a big-name institution stuck on it are passing us by - and while there are some managed funds out there that have performed well, we’re talking about less than 5%. For most investors, the combination of lower fees and better performance will make a huge difference to their long-term goals:
They cost less than managed funds - this puts more money back in my client’s pockets.
The major indexes tend to outperform managed funds over the medium and long term, especially if dividends are reinvested.
People with far more success in investing than most of us have consistently advocated them as a suitable vehicle for most investors (Warren Buffet for example). We’re just too busy to stock pick and trade and those are things 95% of professionals get wrong. And none of us has the resources to pay armies of analysts to investigate each company we are considering investing in like Buffet does.
Index funds will not have the same inheritance tax liabilities in some jurisdictions that individual stocks have. A lot of people holding direct US shares for example are open to the IRS chasing their heirs for death duty (please reach out if you hold individual US stocks!).
Lastly, they are passive which suits most people - we don’t have time to fret over what stocks to buy nor check our portfolios all the time.
All stock investments take time - anyone telling you otherwise is probably selling you something. You need at least 5 to 10 years in the markets to see the real benefits. If you don’t have that time or are uncomfortable leaving money alone for so long you should consider investing smaller sums and/or looking at investments that are designed for shorter terms.
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