The S&P 500 is the number one choice of index funds. Many fund families offer this type of
investment. The S&P 500 is your plain-vanilla investment, giving you instant diversification in
500 big-company stocks, most financially healthy, with an expectation to make you 8 to 11% over a
period of years. This diversification is not only among many companies, but across many industries.
Originally called the "First Index Investment Trust", Vanguard was the first to introduce
an S&P 500 index fund, which has become one of the 2 largest mutual funds in the world.
Another reason for the popularity of index funds is that it doesn't seem to matter which index
fund that you choose. The odds are you're going to beat the average actively managed fund. When
you pick an index, you are locking in the average of the stock group that the index represents.
This is such an easy way to beat most of the pros. For example, during the 25 years ending Dec
2000, 4 out of 5 mutual funds did worse than the average of the stocks belonging to the fund's category.
From 1996 to 2000, the average stock fund was up 42%, but the S&P 500 was up 63%. And of the
28% that beat the S&P in the 10 years ending 2000, 61% didn’t match the index in 5 of those years.
From 1987 to 2001, the average stock fund gained an average annual return of 14.4%, but the S&P
500 gained an average 16.1% per year.
Why don't most professional fund managers beat, or even just match, the average? Probably because
they are all stock market experts.
In 2001, of the 294 mutual funds sporting a five-star rating, and advertised in Barron’s and Money
Magazine in the prior year, only 8% beat the S&P 500 Index.
Index funds are also automatically very tax-efficient, since the fund's turnover (buying and
selling) is only necessary as the makeup of the stocks in the index occasionally changes. When a
company is removed from an index, the stock likely was sold at a loss, so there is no taxable gain
to sock the fund holders with.
Now pay attention. This is a very important point. Although it is possible to “beat the market”
since some have done just that, you still have to have a healthy dose of luck. Index mutual funds
make it easy for you to beat the experts.
Were you paying attention? Standard index mutual funds make it easy for you to beat the experts.
Other Stock Market Basics Topics:
Mutual Fund Advantages
- History of Mutual Funds
- Dollar Cost Averaging
- General advice about choosing a fund
- Mutual Fund Ratings
- Evaluating Mutual Fund Investment Risk
- Mutual Fund Share Classes
- Mutual Fund Fees
- The Mutual Fund Prospectus
- How important is the manager's length of experience?
- Why is the prospectus hard to understand?
- Mutual Fund Annual Report
- Comparing your fund to the competition
- Comparing funds on an after-tax basis
- Average Return on Investment
- How Not to Pick a Mutual Fund
- Cashing in Your Fund
- When to Sell Your Fund
- Mutual Funds and Asset Allocation
- When to get started with a mutual fund
- Types of Mutual Funds
- Value Stock Funds
- Growth Stock Funds
- Small and Micro-cap Stocks
- Mid Cap
- Large Cap Companies
- Income Stock Funds
- Mutual Fund Index
- Enhanced Index Funds
- Sector Mutual Funds
- Stock Market Sectors
- Defensive Stocks
- International Funds
- Real Estate Mutual Funds
- Socially Responsible Funds
- Balanced Funds
- Tax-Efficient Funds
- Bond Convertible Funds
- Junk Bond Funds
- Mixtures of stock types
- Closed End Funds
- Exchange Traded Funds (ETF’s)
- Stock Picking Strategy - Picking your own stocks?
- Fund names, and what they really invest in
- How to get started
- Where can I start investing with no money?
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