You're probably well aware of Warren Buffet and John Bogle's affinity for index investment funds. Buffett, of course, is CEO of Berkshire Hathaway, and Bogle is the founder of Vanguard Group.
Wall Street Journal columnist Jonathan Clements shares that affinity. He adds an interesting point to the discussion: index funds promote good investor behavior.
"Mutual-fund investors have a reputation for buying funds after they have performed well and then selling in a panic when that hot performance turns cold," he writes.
"But here is the surprise: It seems investors behave more sensibly when they bypass actively managed funds, which seek to beat the market, and instead purchase index funds."
That's likely because index funds change holdings only when their indices change, so there is little reason for investors to switch from one to another.
"When you buy an index fund, your only worry is the market’s performance. But when you buy an active fund, you have to worry about both the market’s direction and your fund’s performance relative to the market," Clements writes.
Meanwhile, retirement expert Tom Sightings sees index funds as a helpful tool for retirement investing. "Investing is so complicated," he notes in U.S. News & World Report.
"How do I make the time? No time? No expertise? No problem. Invest in stock and bond index funds. They usually do better than managed funds. Many financial institutions offer both mutual funds and exchange-traded funds that index stocks and bonds."
You won't get fabulously rich from these funds, but you will enjoy the same returns as the overall market, with less risk than if you buy individual stocks and bonds.
And there's an added bonus. "If you own an index fund, chances are you are diversified," Sightings explains.
To be sure, if you have a 401k plan, he warns against investing too heavily in your own company's stock. That's because you don't want to be excessively dependent on your company.
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