Thursday, March 23, 2006

Out with the Singles - In with the Index Funds!

I have put sell limit orders on my single stocks. I have read quite a few articles recently many stating that it is very difficult for the individual investor to compete against large institutions. Individual stocks tend to have large swings and are not diversified. I truly believe in the performance of index funds so I will increasingly be investing in them - plus they are diversified already.

Advantages of index funds vs. other funds:
  • Cost. You will pay more expenses on actively managed mutual funds than you will on index funds, since they are passively managed.
  • Performance. Index funds perform better than 85% of all mutual funds (1998 data). This is very surprising. Managers of mutual funds get paid for what they do and if 85% of them were unable to beat the market what does that say about them? By investing in index funds you will only make what the market makes but you are still better off than 85% of mutual fund investors and have lower expenses to pay!
There are many index funds available and Morningstar.com has a great ETF screening tool that I use.

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