There are lots of articles out there comparing index funds to mutual funds, mutual funds to stocks, and the return rate of CD’s and traditional savings accounts versus the entire stock market. But there aren’t too many publications out there laying out the bottom line between index funds and stocks, so that’s what I’m going to do…in plain English.
If you have no idea about the market, don’t bother investing into individual stocks, for the “pick and choose” mentality hasn’t worked very well for the majority of wealth seekers. If you’ve been dabbling a bit here and there, a few in your portfolio and watch Bloomberg TV every night, then you might just find some success in your venture.
For the rest of us, index funds are the way to go. Here’s why:
An index fund is a type of mutual fund. A mutual fund is a collection of similar stocks bought (like technology or medical, just to name a few) by a group on investors who might not have enough money (or knowledge) to invest in individual stocks. It’s sort of like someone wanting to live in New York City, but knows they can’t afford it alone. So they get a few roommates to slash the expenses. To keep it clean (too many chefs ruin the pot mentality), there’s one member of the homestead who keeps the house in order (we’ll refer to that one person as the “mom”). A mutual fund also has a manager. And just as the “mom” of the home might be “paid” by paying a bit cheaper rent, or not paying a portion of the utilities, a mutual fund manager gets paid on a fee basis.
An index fund follows the entire market index, like the Dow Jones Industrial Average or the S&P 500. The fund buys into all of it, enabling the fund owners to make money as the entire market grows on an average basis.
Now here’s something to think about-
If you invested your money into any one stock in the 1950’s, you’d either be ridiculously wealthy now or broke. If you had invested in an index fund in the 50’s, well, think about how much the market has grown in spite of every up and down throughout history. Do you think you’d be the princess or the pauper?