{"id":1519,"date":"2009-12-17T14:10:45","date_gmt":"2009-12-17T08:40:45","guid":{"rendered":"http:\/\/www.niftylivecharts.com\/blog\/?p=1519"},"modified":"2009-12-17T14:10:45","modified_gmt":"2009-12-17T08:40:45","slug":"are-the-index-funds-right-for-you","status":"publish","type":"post","link":"https:\/\/www.niftylivecharts.com\/blog\/are-the-index-funds-right-for-you\/","title":{"rendered":"Are the Index Funds right for you?"},"content":{"rendered":"
Index Funds – Are they right for you?<\/div>\n
Index Funds – Are they right for you?<\/div>\n
by Gabriel Nijmeh<\/div>\n
Indexing is an investment approach that seeks to match the<\/div>\n
investment returns of a stock or bond index. An investment<\/div>\n
manager tries to duplicate the target index by holding all the<\/div>\n
securities in the index. This is what is called a passive<\/div>\n
management approach which emphasizes broad diversification and<\/div>\n
low portfolio turnover.<\/div>\n
There are a variety of indexes to suit each investment style. The<\/div>\n
largest and well known index is the S&P 500. This index is<\/div>\n
dominated by the largest blue chip companies and accounts for<\/div>\n
close to 75% of the U.S. stock market value. Other indexes<\/div>\n
include the Nasdaq, Wilshire 5000 Total Market Index, S&P MidCap<\/div>\n
400, Morgan Stanley Capital International Europe, Australasia,<\/div>\n
Far East (MSCUI EAFE) and various bond indexes.<\/div>\n
Since 1926, the stock market has an average rate of return of<\/div>\n
11.3%. Investors have earned more or less depending on the type<\/div>\n
of investments and risks taken. It is very important to note that<\/div>\n
this return is before costs have been factored. Therefore, those<\/div>\n
investing in actively managed mutual funds may have a net return<\/div>\n
lower due to these costs and thus will earn significantly less<\/div>\n
than the market average.<\/div>\n
These costs include:<\/div>\n
– Management expense ratio (including advisory fees, distribution<\/div>\n
charges and operating expenses)<\/div>\n
– Transaction costs (brokerage and other trading costs)<\/div>\n
Index fund expense ratios are typically 1 percent and usually<\/div>\n
even less, compared with 1.5 to 3 percent for actively managed<\/div>\n
funds. Fund expenses and transaction costs for a typical mutual<\/div>\n
fund can take a big bite out of your net investment returns. Add<\/div>\n
sales commissions to your purchases and even more of your returns<\/div>\n
are swallowed. Typically, index funds can be purchased on a no-<\/div>\n
load basis thus saving you sales charges.<\/div>\n
Of course, there is always a caveat… during periods of market<\/div>\n
decline, index funds can be expected to suffer somewhat larger<\/div>\n
declines over actively managed funds. A fund manager can make<\/div>\n
adjustments in anticipation of market declines by selling stocks<\/div>\n
and also has the option of holding a cash reserve. This is not<\/div>\n
something that occurs within an index fund because you are fully<\/div>\n
invested in the market and potentially corrective actions are not<\/div>\n
taken. Accordingly they may be regarded as a riskier option for<\/div>\n
some investors during market declines.<\/div>\n
It can also be argued that when you invest in an actively managed<\/div>\n
mutual fund, you are paying a professional to research and pick<\/div>\n
winning stocks. You are not paying them 2 or 3 percent a year to<\/div>\n
park your holdings in cash. If that were the case, you would be<\/div>\n
better off putting your money in your savings account. It really<\/div>\n
depends on market conditions and the fund’s investment philosophy<\/div>\n
and how it matches with your investment goals.<\/div>\n
Another common thought is why shoot for an average return when<\/div>\n
you can try and beat the market. Well, it is very difficult even<\/div>\n
for seasoned money managers to consistently beat the index year<\/div>\n
over year.<\/div>\n
Taxes are another aspect of investing that needs to be considered<\/div>\n
carefully. Every time an active fund manager sells a profitable<\/div>\n
stock, a taxable capital gain is triggered. Anytime some of an<\/div>\n
investment is taxed away, the magic of compounding is<\/div>\n
compromised. Index funds on the other hand are considered tax<\/div>\n
efficient investments because very few stocks are bought and sold<\/div>\n
and therefore few capital gains are distributed to investors. You<\/div>\n
choose when to sell your investments and therefore have a bit<\/div>\n
more control over the tax consequences. Index investing was once<\/div>\n
only available to institutional investors who take tax deferral<\/div>\n
seriously.<\/div>\n
Indexing is a strategy that can be applied in many different<\/div>\n
ways. It is an efficient and low cost way to investment across<\/div>\n
various markets and asset classes. You can build a core holding<\/div>\n
of index funds and add a well managed mutual fund that enhances<\/div>\n
your portfolio’s return.<\/div>\n
What appeals to me about indexing is that I can have a broad<\/div>\n
basket of stocks that moves lockstep with the market so at the<\/div>\n
very least I am guaranteed a market return. In addition, I can<\/div>\n
purchase individual stocks or other mutual funds that will add<\/div>\n
value and enhance my overall rate of return.<\/div>\n
Do index funds fit in your portfolio? This is something you need<\/div>\n
to determine based on your investment goals and philosophy. Over<\/div>\n
the long term index funds should provide competitive returns<\/div>\n
relative to actively managed mutual funds while keeping your<\/div>\n
costs down.<\/div>\n

Indexing is a strategy that can be applied in many different\u00a0ways. It is an efficient and low cost way to investment across\u00a0various markets and asset classes. You can build a core holding\u00a0of index funds and add a well managed mutual fund that enhances\u00a0your portfolio’s return.Indexing is an investment approach that seeks to match the\u00a0investment returns of a stock or bond index. An investment\u00a0manager tries to duplicate the target index by holding all the\u00a0securities in the index. This is what is called a passive\u00a0management approach which emphasizes broad diversification and\u00a0low portfolio turnover.<\/p>\n

There are a variety of indexes to suit each investment style. The\u00a0largest and well known index is the S&P 500. This index is\u00a0dominated by the largest blue chip companies and accounts for\u00a0close to 75% of the U.S. stock market value. Other indexes\u00a0include the Nasdaq, Wilshire 5000 Total Market Index, S&P MidCap\u00a0400, Morgan Stanley Capital International Europe, Australasia,\u00a0Far East (MSCUI EAFE) and various bond indexes.<\/p>\n

Since 1926, the stock market has an average rate of return of\u00a011.3%. Investors have earned more or less depending on the type\u00a0of investments and risks taken. It is very important to note that\u00a0this return is before costs have been factored. Therefore, those\u00a0investing in actively managed mutual funds may have a net return\u00a0lower due to these costs and thus will earn significantly less\u00a0than the market average.<\/p>\n

These costs include:<\/p>\n

– Management expense ratio (including advisory fees, distribution\u00a0charges and operating expenses)<\/p>\n

– Transaction costs (brokerage and other trading costs)<\/p>\n

Index fund expense ratios are typically 1 percent and usually\u00a0even less, compared with 1.5 to 3 percent for actively managed\u00a0funds. Fund expenses and transaction costs for a typical mutual\u00a0fund can take a big bite out of your net investment returns. Add\u00a0sales commissions to your purchases and even more of your returns\u00a0are swallowed. Typically, index funds can be purchased on a no-\u00a0load basis thus saving you sales charges.\u00a0Of course, there is always a caveat… during periods of market\u00a0decline, index funds can be expected to suffer somewhat larger\u00a0declines over actively managed funds. A fund manager can make\u00a0adjustments in anticipation of market declines by selling stocks\u00a0and also has the option of holding a cash reserve. This is not\u00a0something that occurs within an index fund because you are fully\u00a0invested in the market and potentially corrective actions are not\u00a0taken. Accordingly they may be regarded as a riskier option for\u00a0some investors during market declines.\u00a0It can also be argued that when you invest in an actively managed\u00a0mutual fund, you are paying a professional to research and pick\u00a0winning stocks. You are not paying them 2 or 3 percent a year to\u00a0park your holdings in cash. If that were the case, you would be\u00a0better off putting your money in your savings account. It really\u00a0depends on market conditions and the fund’s investment philosophy\u00a0and how it matches with your investment goals.<\/p>\n

Do index funds fit in your portfolio? This is something you need\u00a0to determine based on your investment goals and philosophy. Over\u00a0the long term index funds should provide competitive returns\u00a0relative to actively managed mutual funds while keeping your\u00a0costs down.<\/p>\n","protected":false},"excerpt":{"rendered":"

Index Funds – Are they right for you? Index Funds – Are they right for you? by Gabriel Nijmeh Indexing is an investment approach that seeks to match the investment returns of a stock or bond index. An investment manager tries to duplicate the target index by holding all the securities in the index. This […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[1],"tags":[3483,3802,4473,4467,2367,2966,2360,4466,857,2901,715,917],"class_list":{"0":"post-1519","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-general","7":"tag-finance","8":"tag-financial-planning","9":"tag-index-funds","10":"tag-investing-in-mutual-fund","11":"tag-investment","12":"tag-money","13":"tag-mutual-fund","14":"tag-mutual-fund-investment","15":"tag-shares","16":"tag-stock","17":"tag-stock-exchange","18":"tag-stocks","19":"entry"},"_links":{"self":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts\/1519","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/comments?post=1519"}],"version-history":[{"count":0,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts\/1519\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/media?parent=1519"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/categories?post=1519"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/tags?post=1519"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}