Index funds are my favorite investment funds, and I have invested most of my money in such funds. This article will tell you everything you need to know about indexed funds, even if you don’t know anything right now.
You will discover what exactly they are and how to invest your money in indexed funds without spending time or complicating your life and aspiring to outstanding returns. In addition, I will tell you how I invest my own money and what my preferred index fund is.
What are Index Funds?
Indexed funds, index funds, or passive management are investment funds that directly replicate a stock index.
An investment fund allows you to invest your money in thousands of companies at once, and fundamentally, there are two types: assets and indexes. Active funds, such as Bestinver, Cobas AM, True Value, etc. They are led by a manager who intends to exceed the profitability of the market.
On the other hand, indexed funds replicate the most crucial stock indexes, such as the IBEX 35, the S&P 500, the Euro Stoxx 50, or the MSCI World. In this way, you obtain the historical profitability of the markets in your investment portfolio, a return of approximately 7% per year.
Advantages of Indexed Funds
Meager commissions
Commissions are essential when you invest your money since an extra 1% annual commission will lower your profitability in the long term. The indexed funds have the lowest commissions in the market, being able to invest in some funds of the best managers, such as Vanguard or Amundi, from only 0.30% per year.
An annual management fee of less than 1% is outstanding and will make your long-term results excellent. On the other hand, active management funds and bank funds have annual commissions greater than 2%, a big difference.
The difference in commission is that a management team dedicates hours and hours to analyzing companies and trying to exceed their benchmark, while there is no such work in the passive funds.
You aim for an excellent average return
As I told you before, the historical profitability of the stock market has been more than 7% per year. If you invest your money in an index fund that replicates a vital index, you will likely achieve that profitability in the long term.
You already know that the stock market is unpredictable and that past returns do not ensure future returns, but the risk is minimal if you invest in the long term.
Low risk and high diversification
Investing in thousands of stocks and bonds in a single fund maximizes your diversification, and therefore, your long-term risk is minimal.
In addition, you can combine several funds to not invest all your money in equities or exchanges and give more weight to the fixed income depending on your investor profile.
Combining funds will be done automatically if you decide to start investing in indexed funds, as I will recommend later, applying the Boglehead strategy.
Complications
Investing your money in index funds does not involve any work or complications, and in fact, it is something you can do without spending even 5 minutes a month.
If you decide to invest in these funds through an advisor theft, you will not have to spend even 1 minute a month, as they will do everything for you. The minimum investment is meager, so that you can make periodic contributions.
If you want to invest directly in stocks or active funds, the minimum investment is usually somewhat high, but it is not the minimum investment to invest in indexed funds.
You can invest in indexed funds with minimum contributions of $100 or $150 per month, even $50 per month. You must only remember that the initial investment is usually somewhat higher, with the lowest being around $1,000.
Invest in indexed funds with a broker
Indexed funds would be the traditional option. Open an account in a broker that allows you to buy indexed funds and create your portfolio from scratch.
In this case, the first thing you should do is choose a broker appropriate to your strategy. If you live in Spain, I recommend Selfbank and BNP Paribas, the two that I use. Second, you will have to decide how you want your portfolio of indexed investment funds to be. I believe it is essential to have a fund replicating the MSCI World.
MSCI would complement it with a fund indexed to emerging markets and some fixed-income funds to stabilize your portfolio. As for managers, without a doubt, the best is Vanguard, closely followed by Amundi and maybe Pictet.
I do not consider this the easiest way to invest your money, and if you are starting, I would advise you to do it as follows. You can start doing so if you have experience and take a while if you consider it appropriate.
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