Investing In Index Funds: 10 Tips
Here are 10 tips for investing in index funds. Index funds are an extremely useful tool for investors as they generally have low fees and track a wide segment of stocks providing diversification. However, there are a lot of differences in index funds and these tips can help an investor make an informed decision as to which index fund to choose.
- Choose index funds with low fees. The fees on index funds are generally quite low as there is no need for a team of managers to choose stocks. However some index funds are cheaper than others so compare fees between funds before investing. One of the most important of all index fund tips is to get a low fee fund to save money.
- Understand that index funds reduce risk and reduce reward. Index funds generally offer a stable return but rarely a great return. The index fund will only have a rate of return as high as the market or market segment it follows. Investors wanting to role the dice and go for big returns need to look elsewhere.
- Use index funds as one of many investments. Due to their lack of high return potential, many investors might want to use index funds for some of their investments and use managed funds for another part of their portfolio. One idea is to use a broad market index fund as well as index funds that track specific areas of the market that the investor believes holds promise.
- S&P Index Funds are among the safest. Index funds that track the S&P 500 are among the safest as they track the 500 largest publicly traded companies. These companies, like Wal-Mart, GE, IBM, etc., are stable and their stocks make relatively safe investments.
- Use bond index funds for the most safety. Bond index funds own a diverse mix of bonds. These funds offer an almost guaranteed rate of return with very little risk.
- Small cap index funds offer greater chances of high returns. Smaller companies have more room to grow and offer more of a chance to profit. They also are less able to withstand bad years making them more likely to fold. Small companies offer more risk and more reward to investors.
- Market segment index funds can help investors profit on trends. While picking individual stocks may be difficult for many investors, investors can choose segments of the market that they find attractive and buy index funds that track them. For instance, if you believe that the technology industry is set to rebound you can invest in an index fund that tracks only technology stocks.
- Index funds can provide an easy way to get into foreign stocks. Index funds that track companies that do business in developing countries is an interesting way to play foreign company stocks. Buy investing in companies that trade in America, the investor can gain some of the potential profits to be made overseas with a stable stock market and government.
- Understand the index funds that you are buying. As with any investment, the investor needs to understand the index fund that they are investing money into. Index funds that track the entire market are fairly simple but some track only smaller segments making investor research into the index fund highly important.
- Invest as much as possible. As with any investment, the more that you put into it now the more that you will have in the future. Most companies offering index funds will offer automatic contributions that provide a convenient way to invest regularly.