The Dow Jones Industrial Average hit 22,000 for the first time ever on Wednesday in a record-breaking day for the stock market. The historic marker might have you thinking about your own investments. More people are now buying into a way to keep it simple, cut fees and make more money in the long run by investing in index funds.
You can try to beat the stock market, to watch and choose and trade the individual stocks that you think will do well -- or you can go with an index fund.
William Mahnic is a Banking and Finance Professor at Case Western Reserve University. He was an investment banker for 22 years.
“The majority of my money is invested in index funds. Even I have learned it’s very, very difficult to beat the market,” he said.
But you don’t have to be an expert to understand the concept of what index funds can do for you.
So, what is an index fund?
It’s considered a passive investment. Instead of choosing certain stocks you think will succeed, an index fund includes every stock in the market. The S&P 500 has 500 stocks, so an investment of $1 into an S&P 500 Index Fund would be split among those 500 stocks. It would be the same with an index fund for the Dow and its 30 stocks.
“Whatever that group of stocks do as a group, that’s gonna be your return,” said Mahnic.
Why are index funds better?
For one, you’ll make more money. Passive management outperforms active management most of the time over the long haul. It costs you less, because managers of passive investments take less money. It’s easy. You put your money in and let it sit. Also, you have less to lose.
“The more stocks that are contained in a portfolio, the lower the risk, the better the returns. It’s called diversification,” Mahnic advised.
Who are index funds for?
They’re best for the long-term investor, someone who’s not going to withdraw funds for 10 years or more. Also, the financially unsophisticated may find them helpful, because you don't need to do much - if anything - once you choose the specific fund.
If you’re not currently investing in index funds, you can talk with your broker or even dump your broker and do it yourself. Mahnic says it’s that easy. You can go online and look at companies like Vanguard, Fidelity and TIAA and review what they offer in terms of index funds.