Why Don’t I Just Buy An Index Fund?
This question, almost unheard of even a few years ago, has now become commonplace. My answer, however, is always the same: which one?!
Believe it or not, there are now more than 2,000 index funds from which to choose! But buyer beware…these funds are not all created equal. For example, some index funds cost nothing or next to nothing to own, while others cost more than 1% annually for essentially the same product. Some index funds track incredibly broad sectors of the market while others are narrowly-focused on small sectors. And some index funds trade infrequently while others are much more active.
Each year, Callan, an independent investment consultant firm, issues its Periodic Table of Investment Returns, which graphically depicts annual returns for various asset classes, ranked from best to worst. This chart is a great reminder that short term investment returns are wildly unpredictable, and diversification can shelter you from these market swings. A sector that was a top performer one year can be the worst the following year. So while it may be enticing to just buy a fund that mimics the most recent top performer, this strategy may not be in your best interest long term.
Selecting the right fund (or funds) to invest in can be tricky. Investors should carefully consider their risk tolerances and capacity, time horizon, and tax situation prior to investing. Working with an advisor who puts your interests first can help you structure a portfolio that will serve you well now and into the future.
Want to learn more? We’d love to talk.