For me, summertime brings thoughts of swimming pools and gardening tools. Yesterday I spent almost the entire day happily utilizing one or the other. In today’s post, I want to address other types of pools and tools that can be used as part of an overall financial strategy. While this may not sound as fun, having enough money to live a life you love certainly sounds appealing!
One of the most practical and simplest tools for an investment plan is an index funds. A stock index is a pool, or basket of stocks that represents a market or a segment of that market. Common stock indexes that you have probably heard of are the Standard and Poor’s 500 and the Dow Jones Industrial Average. The S&P500, for example, is made up of 500 large U.S. based companies that represent the U.S. stock market.
An index mutual fund mimics a particular index, allowing investors to buy the index as a whole through a mutual fund. There are several reasons why index investing has grown astronomically in popularity with individual investors over the past two decades.
- Index funds are simple. If you wanted to make a diversified investment in the US stock market, but didn’t want to research and track a lot of different companies, then you could buy the S&P500 index. You would then own a tiny piece of each of those 500 companies through a fund.
- Index funds can be very low cost, since no research team is needed to identify the stocks that need to be bought. The fund just buys the companies in the index.
- Index funds are tax efficient, since the only time stocks are bought and sold within the fund is when the index changes the holdings, which is rare.
- The minimum requirement amounts for index funds are very small. This makes them well suited for someone who doesn’t have enough money to work with a financial advisor, or who wants to manage at least a portion of her own money.
Remember, it’s the money that you keep after related costs that grows. Index funds can be an excellent way to invest. Enhancing an index strategy with scheduled re-balancing or taking advantage of market cycles can add an extra boost to your investment plan while reducing risk.