Investor Questions Podcast

The top 6 benefits of investing in index funds.

Investing in index funds is a growing industry. It is risky and full of dangers and problems that need to be fully understood but the benefits of it are huge too.
Let’s explore directly some of the benefits of index funds that will make you decide to buy one if you are thinking of investing your money properly.

1. It will save you from the market craziness:

The stock market is addictive. It is a crazy market that can affect your health and put you under a lot of pressure and stress. Having an index fund that is properly prepared will save you the time and the effort you will be spending watching this madness.

2. Low cost:
There are several points you should know here.
• Buying an index fund is economical when compared to other ways of investment.
• You don’t have to worry about securing your account constantly. It is a passive investment.
• The expense ratio is minimal so it is affordable for small investors.
There is a comparison between index funds and actively managed funds that you should know regarding the costs. The actively managed funds hire analysts and experts. They aim to make huge returns. If you are looking for cutting costs then you should invest in the index funds.

3. Diversification:
Among the benefits of the index funds, diversification is a main point. If you are investing in anything, you are facing the risks of losing all your business because of a simple mistake. Diversification minimizes the risk of losing your money and exposes you to fewer risks.
Don’t put too many stocks in one place. That is the smart thing to do regarding diversification. Loss is possible and that way you are taking your precautions not to lose a lot of money.

4. The average return is guaranteed:
When you invest in a business, your aim is to have an above average return. Well, not all dreams come true. In fact, most investors fail to achieve even the average return. That is a major benefit here as when you invest in an index fund, you guaranteed the average return.

5. Low maintenance:
If you are retiring and you are afraid to spend the money you will get, index funds are the best investment for you. You will just set the account and forget about it. Of course this is an advantage for all investors but for retired people there are another some special benefits.
• You don’t have to work anymore and yet you will achieve the average return while enjoying your life.
• You don’t have to worry about any medical emergencies that may appear as you will have a large return that will cover any cases.

6. Liquidity:
Why would you consider buying an index fund and not investing in any other business? It is easier, cheaper and it is a market that changes every day exchanging a lot of money.

Well, here are some of the benefits that play a major role in this investment. You need to know exactly everything and choose the best plan if you decided to invest in index funds. It is risky but it may be the biggest investment of your life.

How to buy index funds for your kids?

You will have to spend a lot of effort and time in order to understand index funds properly. If you are a small investor and you have heard of index funds, would it be the smartest move to put your money into something you don’t fully understand? Well, I think you don’t want to risk your money and that is why you need to take your time and do a well-done research about index funds before deciding to invest in them.

When you decide to invest money to save your kids’ future, you will find a lot of options; savings, certificates of deposits and index funds. Index funds are better than savings and certificates of deposits but they are more dangerous. Follow the following steps to make sure that everything will be OK and in order to avoid the high risks of index funds.

• Why are you investing in index funds?
Many parents invest to save money for colleges, medical emergencies and many other causes. Determine the cause as it will help you in the following steps.

When will your kid need the money?
If your kid will need the money after 10 years to go to college, the investment is different from needing it after 2 years.
There are companies that offer you to determine the year when your kids will need the money. It is better if you want things to be the specific.

• Your kid can’t open an account until he/she is 18 years old so you will have to set up the account for them. Also you need to determine the amount of money that will be invested in the index fund. Determine the capital of the index fund and you can add more money to it later.

• How to choose the best company and the best broker?
Experience is needed here. Go to a company that has a reputation of excellent investment plans. Deal with a broker that will give you the best benefits. Check companies’ websites and read the previous clients’ reviews about them. Ask for recommendations from friends and family members especially those who have secured their kids’ future through index funds too.

Take care of the expenses:
Choose the plan that will provide you with the best benefits and the least amount of expenses. This account may stay for a long time and you don’t want to pay a large fee all this time.

• The highly-diversified index fund is the best:
Securing your kids’ future needs more than one plan. That what the highly-diversified index fund provides. They put money in different kinds of security that is why the majority of it is safe as if a security falls, the rest will remain.
Also it does not require to be constantly checked. You just need to agree with your broker on all the details and then your money and your kids’ index funds are Okay.

When your kids are big enough to understand, tell them everything about their index funds. Introduce to them more information to realize that their future is safe and to be prepared to be in charge.

2 major problems of Index funds you need to know about.

There are many ways to invest your money but they all can be categorized into two main categories; active investment and passive investment.
Active investment is when you buy and sell, you are actually dealing with the market while passive investment means you only take what the market is offering and for most people passive investment means index funds.
Index funds is like any other investment have risks; yet the risks of index funds are higher and that is why you need to understand them deeply before deciding to invest in them. You may not be able to avoid the damage but at least you may minimize it. Let’s see two of the major risks of the index funds and how to deal with them properly.

The high trading costs:
Forced transactions lead to these high trading costs and to fully understand this let’s imagine that your index fund buys and holds stocks in a certain range. One of the stocks was in the range in a certain period of time then it went out of it; it is when the index fund should sell the stock. A year later, the same stock is within the range again so the index fund buys and holds it again.
It is a non-productive turnover.

There is a solution of this problem by a system called” hold ranges”. The fund will buy the stocks that are higher than a certain number and the fund will determine a range of stocks below this number that will be just hold not bought. If the stock comes out of the hold range, it will be sold.
This will reduce the costs and improve the tax efficiency.

The in-built diversification that you as an investor think you have is just overexposure to financials.
There are three points to discuss here.
• Don’t own many stocks in the same diversification. We agreed that the index funds are full of risks. So you don’t want to have a high number of your own stocks exposed to the same risk.
• Small actively managed index funds are better than the large ones.
• The index funds have heavy weighting to banks and the resources sector so if you are investing in an index fund, take care of this point. Lower your expectations about the in-built diversification.

So what are the solutions here?
Well there are several points to consider.
• If you gave your portfolio an index tracking base, perhaps you should consider the following points:
– Put only about 30% of index fund capital into your tracker.
– Supply it with overseas funds.
– Supply it with a low cost, actively managed, local funds that don’t have high weightings in banks.
• You can give your portfolio a real diversification when you fill it with some non-financial, non-resources chips.

Every problem in the investment industry has a solution. The problems of index funds may seem dangerous and difficult to be avoided, yet when you know the risk well, you will know how to deal with it. It is an excellent investment so just do your research before deciding to join it.