Can I Just Invest in Index Funds?

Index funds can save you time and money.
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In investing, complicated is often viewed as superior. Yet, this is not always the case. A simple approach to investing often yields better returns than complex methods and high-priced asset managers provide. Index funds afford a simple way for investors to access the market, and there are number of reasons why you can invest only in index funds if you choose.

Unlikely to Beat the Market

Index funds provide you with an average return of the market -- or a specific section of it. Despite the plethora of advertisements to the contrary, it is difficult to attain returns above the market average, even for professionals. Standard & Poor's Indices Versus Active Funds Scorecard consistently shows that most active fund managers lag benchmarks in performance. This means you can invest only in index funds, and may even come out ahead of others who took a more complex approach.

Easy Access

Investing in just index funds has become much easier since 2000 when the number of ETFs available started increasing aggressively. An ETF, or exchange traded fund, allows you to buy and sell an index just like you would an individual stock. Lots of liquidity, often very low fees and the ability to buy or sell at the click of the mouse means you can invest only in index funds, and do it easily.

Access to Solid Companies

To be included in an index, a company has to be solid for its size and market. By investing in an index fund you are investing in a basket of companies which have been scrutinized by rating agencies and/or a league of analysts. Companies which cannot sustain the requirements of being part of the index are dropped and will no longer be part of your holdings. Therefore, you can invest only in index funds and still be investing in the highest caliber companies within the market.

Diversify Yourself

An index fund provides some diversification as the fund holds stocks in multiple companies, potentially across many sectors and even countries. You can diversify further by buying multiple index funds. This will allow you to create your own low fee, broad-based portfolio, gaining access to commodities, international markets, small- and large-capitalization stocks and even real estate. No complex strategies are required; you can invest only in index funds and be diversified as well.

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