What Are Index Funds?
Index Funds were created in the mid-1970s by the now legendary, Jack Bogle. It was his belief that many professional investors were not achieving a market return and people invested in funds that were didn’t see those benefits after fees. For these reasons, Bogel founded the first Index Fund which would later be renamed the Vanguard 500 Index Fund due to it mirroring the performance of the S&P500. Index funds are passively managed, meaning there isn’t a professional making decisions on what should be bought or sold, the fund is only adjusted to match the index that it is tracking.
What Are the Expected Returns of Index Fund Investing?
The expected returns of an index fund largely depend on the index it is tracking. If we assume that it follows the S&P500 or ASX 200, it’s probably fair to expect a 10% return over the long-run but index funds come in all shapes and sizes. Some track stocks, others bonds and REITs, the returns you should expect will depend on the markets that they follow. Further information regarding some of the more popular vanguard index funds can be found HERE.
What Are the Risks of Index Fund Investing?
Much like the returns, you should expect risks to fluctuate based on which market your fund tracks. That being said, a significant advantage of index funds is that they provide diversification across that market. If you take the example of a fund that tracks the ASX 200, you are locking in the returns of the market and also avoiding the risk of picking individual stocks.
How Can You Reduce the Risks of Index Fund Investing?
Diversification is always the answer to how to reduce risk when investing and Index funds have diversification inherently built into their structure. When investing in an index fund you are purchasing every asset in the market, the only way to further diversify is to invest across multiple asset classes. If you own an index that tracks stocks, you could reduce risk by also buying into a fund that tracks bonds.
Are Index Funds he Best Allocation of Your Money?
The appropriate percentage of Index funds in your investments will depend on your risk appetite, financial situation and the amount of time you intend on being invested. The advantage of index funds over other investment assets is they generate returns that may be considered ‘average’ but are better than that achieved by over 90% of professional investors in the long run. They also provide diversification to reduce risk and require no research or regular effort. Index funds are very much set and forget, making them an excellent investment for everybody.
How Can I Buy Index Fund Investments?
How to purchase an index fund will differ based on the type of fund that you would like to buy into. An exchange-traded fund will require a brokerage account, whereas a mutual or index fund investment will need an account with the provider. There are many index fund providers, but as always, we suggest researching Vanguard, they were the first, and they’re the largest. This allows them to offer the lowest fees and when your job is to track a market, the lower costs you can provide the better your performance. You can learn more about Vanguard and some of their more popular products HERE.