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3 Reasons Why I Love Index Funds

Posted By Jim On 08/02/2007 @ 9:13 am In Investing | 7 Comments

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.


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