Why Index Funds Are Your Best Investment Bet
When planning for retirement, many people will suggest that you
individually manage your funds, searching for the best specific
stocks. You'll often get tips from friends - buy this or that
company, invest in the next up and comer. The smartest strategy,
however, is to stick with a major index fund.
Index funds are mutual funds that are tied to a key stock index.
Usually, this means the Dow Jones index or the Standard and
Poor's 500. These are both safe bets - they average strong
returns, and they don't require any management. You don't have
to pick individual stocks - the money is put into a bundle of
stocks that represent the economy as a whole.
This achieves several important goals. First, it makes sure that
your stocks are diversified. Many people are tempted to throw
all of their money into a couple of hot stocks. Usually, people
will have most of their portfolio invested in their employer.
This is a bad idea - it's only one company, and if it goes
under, you lose everything and end up in a cardboard box covered
in dog
fleas . Investing in an index fund means that no one company
can make a significant loss in your portfolio - if one goes
down, you have 499 more. Additionally, people rarely if ever
beat the market. It's just not likely - statistically, even the
best mutual fund managers are not able to outperform the basic
indexes of stocks over time.