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					INVESTING: MAKING YOUR DOLLARS WORK FOR YOU
WHY INDEX FUNDS MIGHT BE YOUR BEST STOCK INVESTMENT STRATEGY

Are you confused by the many options available to you when investing
in the stock market? One of your options - investing in mutual funds -
brings you the benefit of spreading your risk over many different stocks,
so you don’t “put all your eggs in one basket.”

Within this realm of mutual funds, one type of fund always performs as
well as a standard index that measures various parts of the market as a
whole - Index Funds.

What are index funds and, more importantly, are they a good
investment for you?

‣ WHAT IS AN INDEX FUND?

An index fund is a mutual fund whose portfolio matches a stock index.
Investing in an index fund is like owning a little bit of every stock in
that index. So the market exposure is very broad.

For example, a United States based index fund might match the stocks
in one of these indexes:

   ‣   Dow Jones Industrial Average - tracks 30 of the largest publicly
       traded firms
   ‣   Dow Jones Wilshire 5000 - tracks all USA based publicly traded
       companies
   ‣   S&P 500 - tracks 500 Large Cap corporations
   ‣   AMEX Composite - tracks all the stocks on the American Stock
       Exchange


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   ‣   NYSE Composite - tracks all common stocks on the New York
       Stock Exchange
   ‣   Russell 3000 - tracks the largest 3000 U.S. companies


These indexes are widely used for index funds; however, there are also
several more indexes in the USA, so you may find an index fund
matching another index as well.

If you’re interested in investing in foreign markets, there are also index
funds which match international or country specific indexes.

‣ PROS AND CONS OF INDEX FUNDS

Some common criticisms of index funds are that they can never beat
the market (true) and they are not professionally managed (also true,
because the index determines which stocks to buy).

On the flip side, they never do worse than the market. Also, the fees for
management expenses are minimal because you don’t have an
expensive fund management team to pay. Additionally, the portfolio
turnover is usually also quite low.

‣ INDEX FUNDS VS. MANAGED FUNDS

Interestingly, even though index funds never beat the market, they
outperform 97% of the managed funds over time. Sound impossible?
How can a professional money manager consistently do worse than the
equivalent of simply buying and holding every stock available?

The New York Times published a story with research showing that for a
managed fund to break even with the market, it has to outperform the
market by 4.3%. Most financial experts concede that this is highly
unlikely to be accomplished, and the research supports that.

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Looking back over 20 years, it was found that only 13 out of 452
domestic mutual funds met that criterion. That’s less than 3 out of 100
when you include the fees and expenses!

Do you want to pay for guy in a fancy suit and a corner office who fails
with your money 97% of the time?

‣ HOW TO CHOOSE AN INDEX FUND

Selecting an index fund is quite easy. The management talent to run
one is usually not a consideration, and there’s no difference in
performance between different funds based on a given stock index, so
the only thing that really matters is the cost.

Buying shares in an index fund is like buying a bag of white sugar; it’s
all essentially the same - except the price.

Consider these ideas when choosing an index fund:

1. Expense ratio. You’ll find this cost ratio in your materials that give
   the details of the fund. It helps you compare this company’s fees to
   those of other companies.

2. Transactional costs. The expense ratio doesn’t capture the
   transactional fees, so be sure to look at the trading frequency of the
   fund in question.

   ‣   Check to see that they aren’t buying and selling too frequently.
       Buying and selling stocks costs money, so your costs will go up if
       this company buys and sells their stocks more often than other
       companies with this same type of index fund.

   ‣   Compare the various index funds with the index you wish to
       follow to get an idea of what’s typical.


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3. Which index will you follow? There are numerous indexes in which
   you can invest, including small cap, international/foreign, bond, and
   large cap. Study the descriptions of various indexes to determine
   one that fits well with your risk tolerance and goals.

4. Retirement fund options. While you may not have a lot of options with
   your 401(k), there is typically an index fund option. And you have a
   lot of freedom with your IRAs to invest as you see fit, including in
   these funds.

If you’re tentative about investing in index funds because they never
beat the market, remember that beating the market with any regularity
is rare.

The real question might be, “Do you want to invest in the stock
market?” If so, as long as you carefully research your mutual fund costs
and fees, index funds might be the stock investment strategy that
works best for you.




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Curtis Rose is an experienced professional with extensive experience in all
aspects of personal finance. Curtis writes and publishes articles, courses,
guides and special reports on his personal finance blog. Sign up for his
monthly personal finance newsletter and receives tons of free information
that you can use to help you reach financial freedom.

               http://www.PersonalFinanceDashboard.com

				
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