3 Reasons Why I Love Index Funds

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We live in a society where we are taught that we should try to be the best. Be #1 in your class, rise through the ranks of your company and be the best that you can be, be the fastest, smartest, or strongest, best best best. While I agree, we should always try to be the best, the point of investing isn’t to get the highest return, what most consider to be the best, but it is instead of get the highest return for what you’re willing to put into the process and what you’re willing to risk.

I used to read news articles, annual reports, and all those financial pieces on various companies, trying to glean bits of information and figuring out if I could get an edge over the market. I had the time to do that because I was in college, but now? Forget it, reading annual reports? Scouring balance sheets and income statements? No thanks.

So, that’s when mutual funds come into play. You have research without all the hard work of research. You also have diversification (hopefully they’re not diversifying in the general population’s understanding of diversification and actually diversifying and taking into account co-variance and blah blah) without the hard work of actually calculating anything out. The only downside of mutual funds is that very few exceed the market and all are more expensive than index funds.

So, that’s when I moved onto index funds and target retirement funds. The problem with index funds is the geographic and equity exposure. If you’re in an S&P 500 Index fund, you’re in all stocks and you’re in all USA. USA is a wonderful country, man I love it here, but our dollar is getting pummeled because of the trade imbalance and the nearly universal hatred of our President (I voted for him twice, thank you very much), and so you don’t want 100% national exposure. So I’m in target retirement fund to get out of all equity and I’m also in some emerging markets to give me some exposure to EAFE (Europe, Australasia, and Far East).

The beauty of the index fund and target retirement funds is that they are cheap, they are easy, and they will give me at least the market average in returns every single time. The expense ratios are generally tiny for index funds and relatively low on the target retirement funds (not so on emerging markets). In terms of easy, they require no work on my part. I can do something else with that time, even if it is lounging around doing absolutely nothing and being worthless. As for the market average returns, well I think the index fund really speaks for itself on that one. So really, it’s three beauties at once and I love it.

{ 7 comments, please add your thoughts now! }

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7 Responses to “3 Reasons Why I Love Index Funds”

  1. mbhunter says:

    By target retirement fund I assume you mean a mix of mutual funds for which the portions of aggressive investments and conservative investments changes periodically as one nears retirement.

    If this wasn’t what you were talking about, I’ll comment on them anyway. 😉

    My workplace offers target retirement funds, and I agree that they do “make sense” on some level; you don’t “want” to be in bonds early in your career and you don’t “want” to be in stocks when you retire. However, these funds cross the line from diversification within a sector into overall asset allocation, and that asset allocation change throughout the life of the fund is automatic and largely oblivious to prevailing market conditions. If I see stocks as getting hammered sooner rather than later, I want the ability to move out of stocks myself, regardless of where I am in the timeline of the fund.

    Target retirement funds transfer too much investor discretion to a computer program, and I’m not investing in those. I do have some mutual funds, though.

  2. jpsfranks says:

    I’m also in some emerging markets to give me some exposure to EAFE (Europe, Australasia, and Far East

    There are no emerging markets in EAFE, it’s explicitly a developed markets index.

    I voted for him twice, thank you very much

    No comment.

    • jim says:

      Well, I meant exposure to international and didn’t realize that EAFE was a specific asset class so good point.

      You think Kerry would’ve been better?

      • jpsfranks says:

        You think Kerry would’ve been better?

        Unfortunately it’s getting hard to imagine someone doing worse.

  3. plonkee says:

    ‘I voted for him twice’

    They say to choose the lessor of two evils, not the greater 😉

    He certainly isn’t admired but thats not the real reason that you need international diversification, of course. The USA may have the largest economy, but its still smaller than everyone else put together.

  4. MoneyNing says:

    I like low cost index funds but not so much retirement target index funds since you are essentially paying for their services again which you can just do yourself.

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