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I Am Considering Investing In An Index Fund, Is This A Good Idea?

An Index Mutual Fund is designed to mirror the movement of its underlying index.  Probably the most popular type of index fund is those that follow the S&P 500.  The primary benefit to employing an index fund is the ability to put your investments on “auto pilot”.  There are many different types of index funds, but the S&P 500 is the most popular.

Many proponents of the “Buy and Hold” approach to investing suggest that index funds are the best way to invest.  In support of their argument, they correctly point out that S&P 500 index funds (and many others) consistently beat the performance of most actively managed mutual fund portfolios.  Another benefit of index funds is tax deferral.  By holding on to the same stocks for the long run, index funds are famous for allowing investors to defer taxes.  You do have to ultimately pay the taxes on your gains once you sell your fund shares.  You will be able to enjoy many years of tax deferral, since capital gains taxes are not triggered until the fund sells the shares of the underlying stocks in its portfolio.  Most index funds have a very low turnover rate (rate at which stocks are sold) due to the fact that the portfolio strategy involves buying all of the stocks in the index and then simply holding them.

As an index fund investor, you should be familiar with the historical volatility of the index you are selecting.  For example, I would not invest in an S&P 500 Index Fund if I was unable to accept losses of 25% in a given year.  A NASDAQ Indexed Fund would be for those that can take even more risk and are looking for higher potential returns.  Generally, the longer your time frame the more volatility you may be able to withstand.

While this simply approach to investing makes sense, and is probably better than trying to time the market yourself, I still think a private account manager is a better option.  For about 1 to 2% per year, you can get the ongoing assistance of an account manager to work with you to develop a portfolio based on your goals and then monitor it for you on a daily basis.  I have been recommending Robert Yetman of Stock Market Income Advisers for years.  He is a very trustworthy and reliable account manager that I can suggest to you.  The best way to reach Robert is through his e mail  You also may be aware that he writes a column for our website on political and investing issues and has been a friend of CMC for many years.

If you are planning to use an S&P 500 Index Fund, probably the best choice would be the one offered through Vanguard.  They have very low annual fees and are very good about keeping the portfolio turnover low.

Agree or disagree, click on comments below.

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James L. Paris
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