No Shame Index Investing
Now if index investing sounds unfamiliar too you... take a pause you have heard these terms on a daily basis. The Dow Jones or TSX are large major indexes. An index is simply the measurement of a select number of stocks whose sum of prices through a weighted average form an index. The overall index is made up of a group of select companies that aim to capture a broad spectrum of industries and different customer bases. The Dow Jones arguably the worlds most familiar stock market Is made up of big names like Visa, Disney, Apple, Microsoft, Coca Cola and many others. As you can see by just a few of these we already have covered payments, technology, entertainment, software and beverages. And that’s mostly it – one of the reasons index investing has been so common is it takes the guessing work out of picking individual stocks.
What are you going to get?
Some of the best points of index investing:
- You are able to capture the broad market and achieve instant diversification
- Index Funds are very low in fees – which will help you grow your money faster
- Gives good exposure to stocks while limiting risk
What are you not going to get?
- Since the index tracks the general market – do not expect egregious returns like 20+% per year. Sure they will be some years where the index soars but generally you are getting consistent growth
- Since the index is made up of equities (stocks) they are medium risk investments. If you are someone that cannot accept risk and some small losses (2-5%) of your portfolio – maybe something more conservative is better suited for you
How do they keep fees low?
- One of the reasons that investors prefer index funds over mutual funds is because index funds are passively managed. There is no one sitting behind the desk making moves on a daily basis. With an index fund you are really just buying the fund putting it in a drawer and letting your money do the work.
Looking Ahead: Index funds are something that have been on my mind for a long time. Even though I do have stock experience – the diversification and low fees that an index funds offers is very appealing. In addition, I can also purchase index funds for emerging markets like Africa and Asia as well as index funds for other markets like the DAX in Germany or the Nikkei in Japan. Since many North American markets are accustomed to the DOW and TSX and index funds of other markets is a good way to balance a portfolio and sprinkle in some international exposure.
The S&P 500 index which tracks 500 US companies about 10% historical return since 1928
The Dow Jones since Inception has returned about 8% annually
Td E-Series Canadian Index Funds 6.35% Since Inception: Fees 0.33% Annually*** https://www.tdassetmanagement.com/fundDetails.form?fundId=3261
***mutual fund fees can range in the 1-3% range meaning if you would like a return of 10% annually you would need to earn 13%.
Remember with these numbers – these figures represent returns over a long period of time. You cannot just invest your money for 5 years and expect a return of 50% - the returns are a representation of positive and negative years. Some years may be 7% then 20% followed by -5%.
Disclaimer: All of the above information is my own personal opinion. Remember that past performance/historical performance is no indication of future growth potential. Please exercise caution when making any financial decision and consult with a licensed financial representative. Figures are examples only and data has been generated from Investopedia and TD Canada Bank. I do not hold any positions in any of the funds listed above and do not plan on doing so in the next 48 hours.
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