In investing, getting the average market return can actually be a very good thing.
Very few 'active' fund managers (think hedge fund types) beat the market consistently over time.
They may fly high for a year or two, but eventually probability theory takes over and they fall back to the pack, or more probably behind the pack. That’s a fact. Most active fund managers cannot beat the market.
Index investing via Exchange Traded Funds
Index funds are passively managed, which means that their portfolios mirror the components of a market index. For example, the well-known Vanguard 500 Index fund is invested in the 500 stocks of Standard & Poor's 500 Index on a market capitalization (size of company) basis.
Paradoxically, one of the few active investors who has beaten the market, Warren Buffet, is a fan of indexing. Warren says unless you are full time and well-resourced you should stay clear of active investing and just buy low-cost index funds regularly over time.
Warren Buffet has recommended index funds for decades, and famously recently reprised his advice with some wise words for Cleveland Cavalier basketball legend Le Bron James. You can watch the interview here: Warren Buffet advises Lebron James.
Legendary investor David Swensen (and a high percentage of investment professionals) find index investing compelling for the following reasons:
- Simplicity. Broad-based market index funds make asset allocation and diversification easy.
- Management quality. The passive nature of indexing eliminates any concerns about human error or management tenure.
- Low portfolio turnover. Less buying and selling of securities means lower costs and fewer tax consequences.
- Low operational expenses. Indexing is considerably less expensive than active fund management.
- Asset bloat. Portfolio size is not a concern with index funds.
- Performance. It is a matter of record that index funds have outperformed the majority of managed funds over a variety of time period.
Where can I start?
Starting can be very simple. Open a trading account. Watch me show you how to buy a Share, Step-by-Step on this video.
Some ETF's (Index Funds) to research:
Disclaimer: This article does not give you personal financial recommendations, it is intended for general investment knowledge only. Seek further education or independent financial advice if you are unsure about how the above applies to your personal situation. The author holds shares provided by Vanguard, an ETF provider. You can see me buy Vanguard ETF shares right here on this video.