The following is a brief financial planning lesson for you. While everyone has their own opinions about where to put your investments, this is one concept we all should consider: index funds.
What is an index fund? It is a mutual fund that is managed to follow the average rate of the market it is in (the index). An example would be an index fund for the U.S. stock market. The fund manager’s goal would be to maintain an average increase in the funds value that matches the average overall increase in the stock market as a whole.
What are the advantages of index funds? Index funds typically have the following benefits:
1. Their fees tend to be lower. Always shop for the lowest fee mutual funds, as you don’t need to be throwing away your money for high fee accounts.
2. Index funds tend to be lower risk. The goal for this type of fund is to avoid risky investment. The fund manager searches out some of the most stable stocks or bonds that are also consistently following market trends.
3. While you won’t get rich with an index fund, you should maintain a healthy investment portfolio. An index fund won’t buy you the nicest house on the street, but it will ensure that you have enough money to live comfortably when you do retire.
If your investment dollars are limited, many experts recommend spreading them out between a few index funds. For example, you can have index funds that follow U.S. stocks, bonds, or international investments. Diversity is crucial, and inherently in the design of a mutual fund is to allow that range of diversity. Sticking to index funds for long range planning goals will ensure you reach them. You can always use some extra bonus money for something risky, but save your core dollars for something safe with the potential for moderate growth.
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