My risk tolerance is low. When I invest my savings, I’m afraid I’ll lose all of my money. I don’t want to put my eggs in one basket. How can I get a high return on my investment while still have that feeling that my money is safe?
The consensus around the internet is that everyone loves index funds. So I bought index funds. That was 2-3 years ago. My return is around 10% per year. That means that if I had $10,000, it would give me an extra $1,000 a year. Here’s why most of my money is in index funds.
1. Low fees. Actively managed mutual funds get hit with major management fees. They also get hit with more taxes because of frequent trading. Investing $10,000 means you can be paying $200 a year in fees. Index funds? $10-20 bucks a year.
2. You get automatic diversity. Diversity prevents you from losing your money if a company goes sour. A single index fund invests in hundreds of companies. Unless they all decide to go broke, your money’s pretty safe.
3. You don’t have to do a lot of research. Just pick a sector you like and there’s probably an index fund for it. You like large U.S. companies? Vanguard 500. You like smaller companies? Vanguard Small-Cap Index Fund. Real Estate? Vanguard REIT Index Fund.
4. They beat most mutual funds. The S&P 500 has beaten most mutual funds year after year for the past 50 years.
Here’s a list of other cats who like index funds:
- Free Money Finance - Why I Like Index Funds
- AllFinancialMatters - Yet Another Reason to Use an Index Fund