When it comes to investing, there are two general and common mistakes that the average person often makes. The first mistake is that they buy and sell their stocks at inopportune times, a problem that leads many to sell low and buy high. The second is that many people don’t even have market investments in the first place. When asked to explain why, they will often reply that they don’t understand enough, that they are too indecisive to build a portfolio, or that they simply find the complex world of mutual funds, short-selling, dividend reinvestment, and internet banks too intimidating for their comfort. This second mistake scares people out of the stock market and prompts them to put their money in far less profitable bonds and saving accounts.
My solution to both of these common mistakes is a simple one: index funds. Of all the investment opportunities out there, index funds are some of the safest, cheapest, easiest, and most profitable. There’s not much not to like. Unlike mutual funds they have minimal fees and low penalties. Unlike individual stock purchases they offer instant diversification by immediately exposing a portfolio to a wide range of companies and industries.
While diversification and low fees may appeal to all types of investors, index funds are uniquely suited to the needs of the most inexperienced and amateur ones out there. For one thing they are easy to track; if you own an S&P 500 index fund, you simply need to open the paper or turn on the news in the morning to see how your investment performed the previous day. Index funds also lower capital gains charges that can pose headaches for the inexperienced investor come tax season. And, of course, they insure that you’ll never have to worry about the diversification of your portfolio. All of these add up to one crucial long-term benefit: unlike with other investments, there is little reason to actively buy or sell index funds. Once the investor has an index fund in his portfolio, he can sit back, take any volatility in stride, and let it grow for several decades.
Of course, an index fund by its very nature cannot beat the overall market and cannot insure one against massive economic volatility. But such volatility would likely affect every other investment vehicle, and studies have shown that it is very rare for even an expert investor to beat the market in the long-run. It is thus the rare investor who will not benefit long-term by buying an index fund. If you’re intimidated by the market or get anxious whenever your stocks decline, an index fund might be just the answer to your investing woes.
This is a guest post from Jenna Smith, a resident and student in the heart of the Midwest, St. Louis. Upon graduation she hopes to travel the world writing about her travels. Someday Jenna hopes to be part of a worldwide publication or start her own platform for unique writers like herself.