There are various financial instruments available for investors who wish to make profits in the stock market. Index investing is one of the vehicles that come with a number of attractive features. Here are some of the benefits of index investing.
Simple and Easy
There are literally thousands of companies listed in the stock exchange. It is quite difficult for any investor to choose the right stock and earn good profits. It requires a lot of research and diligent homework to identify the right stock. This could be a difficult exercise for most investors, especially for newcomers to the stock market.
Index investing offers a much easier way to invest in stocks. It provides the opportunity to invest in a diversified portfolio which would guarantee average returns. Instead of aiming for above-average returns and then failing, investors can safely use index investing to ensure that their returns are guaranteed to be in line with the overall market performance.
Better Performance
It is estimated that index funds outperform actively managed funds by 80%. In other words, investing in an index fund would ensure a 4 in 5 chance that the investment would perform well than other forms of investments. On the other hand, money invested in actively managed funds would probably perform badly 80% of the time. The investor only has 1 in 5 chances of seeing profits.
Lower Costs
Actively managed funds incur a lot of overheads which makes them underperform most of the time. There are fund managers, analysts, traders and a number of other experts who can eat into the profits generated by actively managed funds. On the other hand, such overheads are almost non-existent in an index fund. There is very little costs incurred on index funds as they just follow the market average. Therefore, index investing would make much better sense to the average investor.
Low Maintenance
Most people wish to invest for the long-term. Especially those who wish to save for their retirement want to invest and then forget about their money until retirement time. Index investing offers this facility as it requires almost no maintenance. Just by following the market average, index funds would accumulate profits over a 20 to 30 year period. Index funds are therefore an ideal means for long-term investing, especially for retirement.
Index investing provides a number of benefits to investors. It is also suitable for a wide variety of investors including those who are new to the stock market.