Index funds are a good way to invest money. The Efficient Market hypothesis tells us that all of the information that is available about a company and its stock is already reflected in the price of the stock. As a result, it is impossible to beat the market if you subscribe to that theory.
Index Funds allow us to invest in the market in a manner that is in harmony with the Efficient Market theory. With index funds you are buying the market. When you buy an index fund you don’t pay a premium for supposed insight and wisdom that the market doesn’t know. With index funds you acknowledge that the market has got it right.
Index funds are quite cheap since you are not paying for all of the research and analytics to find market-beating stocks. Their expense ratios are low since the typical fund manager simply needs to buy a stock in the corresponding index and hold it. There are few transaction costs for the fund manager. With the reduced transactions there are lower capital gains for the investor who has the fund outside of a tax-advantaged retirement fund.
Index funds can play an important part of your core equity position in your investment portfolio.
Related Activities and Side Trips
- Equities in a Taxable Account
- Every Investor Should Have Investment Rules for Asset Allocation and Rebalancing
- How to Start Investing – Asset Allocation 101
- How we Invest – Improving our Investment Success
- Index Funds – All In or All Out
- Index Funds, Tax-Managed Funds and ETFs – Low-Cost, Diversified
- Stocks in Retirement Accounts
- Why You Want to Invest Long-Term and Keep Fees Low – The Battle for Alpha
