Have you ever been to one of those rooms full of mirrors with funny reflections? It doesn’t matter if you move your head from side to side, make a weird face, or lift your hands up, all the mirrors will always replicate your movement. In the world of investing there are mirrors called index funds.
Having an investment fund that increases its value whenever you lift your hands up. Sounds awesome, right?
Well, that is not a real thing, index funds don’t replicate your movements, but act as a reflection of market indices.
Let 's dive in…
What are index funds?
Also known as tracker funds, index funds are bundles of stocks that aim at replicating the behavior of a specific market index. They were created as a passive investment strategy that, instead of trying to beat the market, it mimics its performance.
For instance, imagine you’re looking to create an investment portfolio that mimics the behavior of the Dow Jones Industrial Average. To do that, you’d have to buy some Apple stocks, some of Microsoft’s, Coca-Cola, and the rest of the 30 companies that are part of the index, always replicating their ponderations. This means that, if 10% of the index is formed by Apple stocks, 10% of your portfolio should also be formed by Apple stocks.
Finance firms created index funds to save investors to go through all that annoying process of checking each index and each one of the stocks all the time.
Instead of that, you can now invest in the index fund and let the management team take care of the rest. That simple!
Benefits of index funds
- They are usually profitable. As we saw earlier, index funds carry a lower level of risk because they mimic the market instead of trying to beat it. For this reason, it is known they will have a market-like performance and bring good results over the long run.
- The price of index funds are relatively lower than those of other types of funds.
- You don’t need to be an expert investor to invest in index funds. If you want to check how your investment is doing, all you have to do is check how the market index is doing.
- Besides of the easy tracking, you’ll count on professional management. Index funds are managed by experts who work at looking for and buying the corresponding assets.
Invest as a pro
Did you know that one of the most successful investors of all time actually recommends investing in index funds?
That’s right! The great Warren Buffet says that investing in index funds is the best option to make your capital grow.
Buffett bought his first stock at the age of 11 and now he owns thousands of stocks of the most important companies in the world. Surprisingly, he states that you don’t need any kind of technical expertise to be a successful investor.
“By investing periodically in index funds,the know-nothing investor can out-perform most investment professionals”.
Would you like to become an investor as successful as Warren Buffett? Follow his own advice and start to invest in index funds. All his years of experience are not in vain.
To wrap it up…
In reality, there is no way to ensure that index funds are a better option than any other financial vehicle. There is never a one-size-fits-all pattern for everyone to follow in the investing world. It all depends on your investing strategy, financial goals, and risk tolerance.
However, if you are a beginner investor, or are looking for a way of making your capital grow with not much of an effort, index funds can be a great alternative for you.
Before running to invest in index funds, make sure to check out the rest of articles in our FlexAcademy blog. You’ll find more investing strategies and different options in case you’re looking for something different. Good luck!