Index funds, at their most basic, are mutual funds that copy a specific market. For example, some index funds copy the US stock market, others the US bond market and some copy the international stock markets. There are quite a few different index funds tracking different markets all over the world but they all have the same basic goal; match their return to that particular market.
While some might believe that index investing, which is a type of passive investing, only allows someone to achieve average returns, the fact is that index investing has been shown to outperform many active investing strategies.
One of the reasons for that is simply that active investing is extremely difficult, especially for someone who isn’t a professional investor. In fact, even the majority of professional investors aren’t able to beat the market and are inconsistent in their performance at best. By using a passive investing strategy, the smaller investor is able to achieve better returns in the long run with index investing.
By simply seeking to achieve market returns, index investing is more effective than many active investment strategies. Here are 2 of the most important reasons why;
1) Index funds are well diversified. Since they invest in an entire market, diversification is guaranteed. Any financial expert worth their salt will tell you that diversification is one of the biggest keys to investing success.
2) Index funds are extremely consistent. Consistency has been shown time and again to be vitally important in the long term for investors looking for excellent returns. Investing in indexes is an easy way to stay consistent.
Yes, index investing is a passive form of investing and, in most cases, you will simply get the market return on your investments. When you consider however that most active investing strategies don’t achieve this, it makes investing in indexes a solid choice for smaller investors who are looking for excellent long-term returns.