If investing seems like an unpredictable gamble to you, mutual funds are your next best option. The problem with mutual funds is that, sadly, most will not beat the market’s average. They often charge fees as well, which can eat away at your profits. Many are also hyperactively managed. There is a solution to this unfortunate problem. The simple index fund.
Over the past decade, less than 20% of large-cap funds run by “professionals” have beat the market average. Even if a fund does produce yields of above the market average, they have to perform well enough to balance the fees that most mutual funds charge. For example, if the market average is ten percent and a mutual fund produces an eleven percent yield in a given year, the investor has to include the two percent fee charges. This would send the investor’s investment to nine percent and again under performing the market. Most mutual funds are also so vast that it becomes impossible for them to beat the market because if they pick a winning stock, it will be diluted by the performance of all the other stocks in the fund.
An Index is a group of stocks that are meant to represent the overall performance of the stock market. Examples include the S & P 500 and the Dow Jones Industrial Average. An index fund is a specific kind of mutual fund that mimics market indexes. So, if you buy an S & P index fund, you will have a mutual fund that yields the same results as the S & P 500. Even better yet, is the total market index. This will produce the exact same results as the entire stock market. The stock market averages a ten percent increase every year, so a total market index will average a ten percent increase every year as well.
This is a solution to the mutual fund problem because, index funds tend to be passively managed and require only small fees. Also, because they are passively maintained, there are far less tax penalties which leave investors with more profit in their pocket.
Some great companies to purchase index funds are Vanguard and Fidelity. Both charge low fees and have very strong reputations. You can visit both of their websites at www.vanguard.com and www.fidelity.com.
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