Index funds

Looking for a quick way to diversify your investments? Invest in index funds! Index funds are mutual funds that are designed to match the performance of an index in a specific market. Most funds try to do better than the index, but index funds try to match the performance of the index. 

Here are two examples of Vanguard index funds:

500-index fund– Included in this fund are several different sectors – Energy, Health Care, Industrials, Utilities and others. Some of the funds largest holdings are Exxon Mobile Corp, AT&T, Proctor & Gamble and Microsoft. Not only is the 500-index fund tracking the performance of hundreds of individual companies, the companies come from several different sectors in the economy. This means that if the energy sector goes belly-up, your investment will be okay because you were only 11% vested in energy with this fund. Or if Microsoft goes bankrupt, it won’t be a huge problem because Microsoft made up only 2-3% of your entire fund.

 

Pacific Stock Index Fund– This fund is interesting because it is made up of corporations in Asia and Australia. Some of the companies that are held by this index fund are Toyota, Mitsubishi, Canon and Nintendo. Although those companies are huge, they only make up about 7% of the entire fund. The fund is also diversified as far as where the companies are located. This fund is comprised only of corporations from Japan, Australia, Hong Kong, Singapore and New Zealand.

 

As you can see, index funds allow your investments to be extremely diversified. They are also great because they do not require much managing which means you pay hardly any management fee.  If you are still interested in investing some money in the stock market, I highly recommend that you call a company such as Vanguard, Fidelity, or Charles Schwab and have them set up an account for you and advise you on your investment options.

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3 thoughts on “Index funds

  1. geopoliticalrooster November 8, 2007 / 3:51 am

    Indexing can work well for the long term investor – especially when a multiple index strategy is implemented. I, respectfully, take issue with the conclusion though. Let’s just start with the fact that, with resources available to us, we already know which active managers are the ones that beat the indexes – net of their higher fees. I can name a dozen funds that have beaten their index (without even looking them up) over the ytd, 1yr, 3yr, 5yr, 10yr and since inception numbers. I can name 5 that have done so for at least 40 years. Also, this does not address any risk on the inbetween. For many investors beating the market when things aren’t going well is far more important then beating the market when things are going well. If you need any stability in your portfolio, indexes don’t provide it. The S&P 500 (the 500 largest companies in the U.S.) declined 50% from 2000-2002. A full 78% of actively managed funds in the group beat that index over that period. Combine better down market management with competative up market management, and you have a winner – winning, in this case, by not losing.

  2. moneywinks November 8, 2007 / 4:47 am

    Thank you for your comment Geopolitcal Rooster. I tend to look at 2000-2002 as more a roller coaster time considering all that was going on in the United States. I think to just mention a couple years is not that accurate. Let’s look at the last 5 years of the S&P 500. It has grown from 1000 and has exceeded over 1400.

    I think Index funds are a great place to invest for the long term.

    Keep Saving!

    ~Moneywinks

  3. geopoliticalrooster November 8, 2007 / 5:07 am

    Moneywinks. I am a big fan of your blog! Thanks for the forum. I mentioned 2000-2002 for the very reason that it was a bad time. One of my points was that bad times is where active management adds the most value. I wasn’t trying to focus on a short period in time. In fact, I also mentioned that I could name a dozen funds that have beaten their index over the ytd, 1yr, 3yr, 5yr, 10yr and since inception numbers – and that I could name 5 that have done so for at least 40 years. 5 may not seem like that many, but active management wasn’t that common pre-1950. In fact the index itself turned 50 just this year. Like I said, I believe indexes will work fine for long-term growth investors but they may, still, not be the best choice. They are, very likely, not the best place for those interested in controlling volatility.

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