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Closed-end Funds
By Chris Stallman

Fund Classifications
By Chris Stallman

Index Funds
Date Added: January, 2000

By Chris Stallman  |  E-mail

   There's one thing that almost every single portfolio manager and investor tries to do: beat the market. What this means is that they want to earn a higher rate of return than the stock indexes had for that year. Or in other words, they just want to make a lot of money.

   As we explained in our article about stock indexes, stock indexes are groups of stocks whose values are added together. Investors look at the value of the stock index and can quickly determine how well the stock market is doing rather than having to look up every stock on their own.

   Everyone tries to beat these markets but an amazing thing is that most of them cannot do so. In fact, the stock indexes usually outperform between 80-90% of all investors!

   Wait a second? Are you trying to tell me that people who earn 6-digit incomes and spend their days analyzing and picking stocks cannot beat a stock index? Well, there are some mutual funds that can beat the index but very few are able to do it consistently. Over the long-term, many mutual funds fall well short of the performance of the stock index.

   Rather than trying to always beat the stock market (and failing to do so on many occasions), wouldn't you rather just invest in a stock index and earn more than about 85% of all investors? For many investors, the answer to that question is "yes" and that is why index funds were created.

   Index funds are mutual funds that buy stocks that are in a particular index. Not only do they buy the same stocks, but they also buy them in the same proportion. This allows the index fund to react very closely with the overall stock market.

   Index funds are great because they offer higher rates of return than most mutual funds. Not only that, but they also have lower fees. Because the portfolio of stocks is not really controlled by a portfolio manager and they require less time to manage, the mutual fund can charge investors smaller fees.

   If you're planning to invest for the long-term and aren't going for the "get rich quick" approach, index funds are some of the best mutual funds that you can invest in. If you start young, the amount you can earn is only limited by the number of digits you can fit on a check.

 

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