3 Reasons Why You Should Invest in ETFs or Index Funds
I have been investing in index funds since I was in college. I invested my savings that I am not planning to touch at all for at least 30 years in Total Stock Market Index Fund and the principle is that the stock market will always goes up and reach a new all time high within this 30 years span.
What is Index Fund/ ETF?
Index fund is a fund with portfolio that tracks an index in the market. For example, the Standard & Poor’s 500 (or more commonly known as S&P 500) tracks the 500 largest companies that trade in the New York Stock Exchange and Nasdaq.
Essentially by investing in this index, you are investing in a small amount of each company that are listed in the index. Let’s say that there is an apartment building that has 100 units and each unit is being sold for $100,000. Instead of buying each unit for $100,000, you then pay $100 to own a share worth $1 of each apartment. This means that you are not an owner of any single whole 1 unit but an owner of a portion of all the unit in the building.
An ETF works like an index fund, except it behaves like stocks, which means you can buy and sell it as much as you want throughout the trading day, as opposed to index fund that allows you to invest once a day. In term of performance however, there is virtually no difference between ETF and Index Fund.
Why Invest in Index Fund?
3 reasons why you should invest in anything really is you want a good return on your investment with the minimal amount of work and acceptable risk.
It provides a better return than individual stocks in the long run
The idea is that the stock market always goes up in the long run. By investing in the market as a whole you are going where the market is going. Compared to picking individual stocks that could go bankrupt and cause you to lose all your money.
You may not beat the market, since you are exactly where the market is but in my book, if I am beating the inflation, I am earning money.
It is easier to invest in index funds than to look for individual stocks
Since you are investing in the whole market, there is no need for you to pour over all the financial statements that you will have to do if you were to invest in individual stocks.
It’s safer than picking individual stocks due to broad diversification
Since you are investing in the whole market, you are much safer than if you were to invest in an individual stock. Let’s say that you invest in an energy company and the CEO of the company embezzled funds from the company which causes shareholder to lose trust in the company. In turn, the stock price will goes down.
Index fund however self cleans itself. Let’s say that you own the whole market, and the same energy company went bankrupt. The value of the company is no longer counted in the stock market. This is why index fund is safer. Sure, the price may goes down a little bit, but it will not goes down as much as if you were to own the company’s stock individually since the company is just a small percentage of the total stock market.
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