benefits of index funds

The Amazing Benefits of Index Fund Investing

Erik Financial Education, Markets, Thoughts of a Mastermind 13 Comments

THIS POST MAY CONTAIN PAID AND/OR AFFILIATE LINKS.

Disclaimer: I’m not a licensed investment professional. All investments come with risk. Please do your own due diligence before investing in any product.

Investors and traders ask many of the following questions each year: what stock do you think will perform best this year? Is there a sector that will see success in the next 2-3 years? What companies’ have the best outlook?

For the everyday person, many of these questions are not worth asking, or answering. I personally own thousands of companies, and I never think about those questions. With so little time to devote to financial statements and investment research, it’s just not worth looking for the next Amazon or Apple.

How do I own thousands of companies? It’s quite simple! Index funds!

In this post, I will be sharing with you the benefits of index fund investing, why I own thousands of companies, and how you can own thousands of companies.

What are Index Funds and the Benefits of Index Fund Investing?

What are index funds?

Index funds are essentially a collection of assets which as a whole, look to replicate the performance of some market or sector.

For example, a stock market index fund would be a collection of many stocks, such that the performance of the index fund would mirror the performance of the general market.

There are many index funds you can buy through different brokerage accounts. To give you a better idea of some examples of index funds, looking at my 401(k) account, I have access to the following index funds:

  • General Equity Market Index Fund
  • Large Cap Index Fund
  • Small Cap Index Fund
  • Dividend Index Fund
  • Bond Index Fund
  • International Equity Index Fund
  • And the list goes on and on

There are 100s of funds out there for many different sectors, asset classes, and industries.

What are the Benefits of Index Fund Investing?

“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.” – Warren Buffet

Warren Buffett, John Bogle and many of the other great investors believe investors like us should invest in index funds. There are a few benefits to index fund investing vs. investing in individual securities.

One such benefit of index funds is diversification. It’s unfortunate, but it’s a fact that some companies will fail. It’s also a fact that some companies will outperform others. Humans don’t have crystal balls, and to be able to select which ones will fail and which ones will perform well is nearly impossible.

Instead, with index funds, we can own a piece of many companies, and if some fail, it is fine. We will also own the winners! On average, we will be able to replicate the general market. Over time, the market typically has trended up, and as a result, index funds allow us to able to capture this trend.

Another benefit is a combination of lower fees and out-performance when compared to actively managed funds. Vanguard’s equity index funds average a 0.12% expense ratio vs. 0.62% for actively managed funds. In addition, these index funds have outperformed actively managed funds for many years!

Why pay more for less? Index funds are superior when considering fees and performance over time.

Why Do I Own Thousands of Companies?

what are index fundsI own thousands of companies through index funds because it’s just easier.

Like I mentioned above, I don’t have time for research. I am not good at predicting the future, and the fees involved with trading individual stocks can be overwhelming.

I don’t like actively managed funds because of the expenses associated with them.

I’m a human, and so I’m naturally lazy.

Buying an index fund is passive investing, and allows me to build wealth without effort on my part.

Adding a few hundred bucks a month will allow me to build wealth and retire someday!

How You Can Own Thousands of Companies

Index funds are not exclusive to only high net worth individuals. Beginners and experienced investors alike can invest in index funds with little involvement and effort up front.

To own thousands of companies and get invested in the general market all that is required is to open up a brokerage account, do your due diligence and figure out which index fund is appropriate for your risk tolerance and financial situation, and boom! You’re invested!

Many people like Vanguard index funds. I know many personal finance bloggers who swear by these funds and will always invest in them!

Like I said, it’s not difficult to get invested in these index funds, and be on your way to owning thousands of companies.

Open a brokerage account or retirement account.

Figure out which funds are the best for your personal financial situation.

Set and forget! Stay consistent with your investing, continue to learn more about finance and saving, and you will be on your way to financial success. Over time, you might be able to become a stock market millionaire!

Conclusion

I don’t have time to research the entire market for the best companies and stocks, and even if I did, my predictions would most likely be wrong.

I’m guessing you don’t have time to research and look over financial statements. If you are looking to invest passively, take a look at index funds.

With minimal fees, and the ability to own thousands of companies, properties, and bonds, you can capture the general trend of the market and reduce risk through diversification.

This may sound like a boring strategy to wealth, but it’s a time tested winning strategy for financial success.

I own thousands of companies – will you?

Readers: do you own a piece of thousands of companies? Do you enjoy researching individual assets? What are your thoughts on index funds?

Erik

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Comments 13

  1. Erik, I am an individual stock picker at heart, but do have some index funds for diversification. I especially like them in my IRA for diversification there. VYM is my favorite and fits closely with my dividend growth strategy. Tom

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      You like studying those individual stocks. While I like that as well, I like doing other things!

      Love the diversification comment. Thanks Tom.

  2. Ther are a few reasons that I like to invest in an index fund or ETF. The first is the long term trend. It’s always up. The second is the diversification and it quite easy to diversify your money even if it’s not a lot. The third is the cost. The less you pay in fees, the more money you’ll keep in your pocket in the long run.

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  3. We are big Vanguard and Index Fund fans over here 🙂 It took us awhile to realize the benefits, but after seeing many excellent blog articles around the topic, we realized how beneficial index fund investing can be and have used it for several years now. It is a great tool in our portfolio!

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  4. I am trying to diversify and invest in Index Funds and ETFs more but most of my portfolio is still in individual stocks. I agree with you it is time consuming and I don’t think I spend enough time on it to justify my selections. It is a slow process to change bad habits!

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      It’s alright – making improvements little by little is great, but if you are successful with individual stocks, then it’s probably fine!

  5. We’re predominantly in Vanguard and Fidelity index funds. Mr. Groovy plays with some individual stocks that have paid off, but it’s a gamble. We’re prepared to lose that money.

    My brother tried to get me with his financial advisor. She’s into products way too complicated for me, i.e. Master Limited Partnerships, etc. My brother has fun spending hours upon hours analyzing. He’s a financial/computer braniac. I’m not.

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