Mutual Fund Index

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.

• Past 5 years, average stock fund up just 42%

• S&P 500 Index up 63%

Were you paying attention? Standard index mutual funds make it easy for you to beat the experts.

Other Stock Market Basics Topics:

1. Mutual Fund Advantages
2. History of Mutual Funds
3. NAV
4. Dollar Cost Averaging
5. General advice about choosing a fund
6. Mutual Fund Ratings
7. Evaluating Mutual Fund Investment Risk
8. Mutual Fund Share Classes
9. Mutual Fund Fees
10. The Mutual Fund Prospectus
11. How important is the manager's length of experience?
12. Why is the prospectus hard to understand?
13. Mutual Fund Annual Report
14. Comparing your fund to the competition
15. Comparing funds on an after-tax basis
16. Average Return on Investment
17. How Not to Pick a Mutual Fund
18. Cashing in Your Fund
19. When to Sell Your Fund
20. Mutual Funds and Asset Allocation
21. When to get started with a mutual fund
22. Types of Mutual Funds
23. Value Stock Funds
24. Growth Stock Funds
25. Small and Micro-cap Stocks
26. Mid Cap
27. Large Cap Companies
28. Income Stock Funds
29. Mutual Fund Index
30. Enhanced Index Funds
31. Sector Mutual Funds
32. Stock Market Sectors
33. Defensive Stocks
34. International Funds
35. Real Estate Mutual Funds
36. Socially Responsible Funds
37. Balanced Funds
38. Tax-Efficient Funds
39. Bond Convertible Funds
40. Junk Bond Funds
41. Mixtures of stock types
42. Closed End Funds
43. Exchange Traded Funds (ETF’s)
44. Stock Picking Strategy - Picking your own stocks?
45. Fund names, and what they really invest in
46. How to get started
47. Where can I start investing with no money?
    

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