What should beginner Investors know?
They should know that no wise investor wants to lose their investments. Wise investors invest in ways and styles that have low costs, low risks but high returns. The world’s most succesful investor recommends index funds.
What are index funds?
An Index fund or an index tracker is a mutual fund or an exchange traded find (ETF). So before defining what an index fund is, it is important to understand what a mutual fund and exchange traded fund are.
What is a mutual fund?
This is a pool of money collected from investors and invested in securities. These securities include stocks, bonds and short term instruments like treasury bills, certificates of deposit (CDs), commercial papers, bills of exchange and others.
While Exchange traded funds (ETFs) are made up of assets such as s, bonds, commodities, forex, oil, future stocks
What then is an index fund?
An index fund is a mutual fund or exchange traded fund (ETF) designed to follow predefined rules so that the fund can track the members of a financial market index (a market index is a speculative portfolio of investments representing a segment of the financial market) index fund is also known as “index tracker”
Index funds follow their benchmark index independent of what happens in the market.
Why are index funds recommendable?
Index funds offer the option of immediate diversification. One purchase of index funds comes with a portfolio of diversified companies. A share of one index fund grant ownership of sometimes, hundreds of companies to a single investor. An added benefit maybe the option of enjoying dividend policy flexibility.
It has a low operating cost. Little is charged for higher benefits accruable.
The wide diversification of index fund lowers the risk for investing in it as opposed to investing in an individual stock. Although the chances of losing an investment are not completely eliminated, index fund experiences fewer fluctuations than an individual stock does.
Index fund has attractive returns. It has at least a 10 percent annual return over a long term period,
Besides benefits mentioned above, let’s find out what the world’s most successful investor, Warren Buffett, has said about index fund?
Warren Buffett’s Portfolio consists of only two investments. The first is an index fund.
Buffett recommends putting 90% in an S&P 500 index fund.
Buffett recommends that the other 10% of the portfolio go to a low cost index fund that invests in U.S. short term government bonds.
Buffett has put this simple 2-fund portfolio to good use.