11 Reasons Why You Should Invest In Index Funds

Some people want to retire early and pursue other passions in life. Others simply want to have enough money, and never have to worry about money again. Whatever the reasons for pursuing financial independence, index funds are one of the best ways to achieve this goal.

In this article, we are going to look at the top reasons why you should invest in index funds.

What Is An Index Fund?

Imagine you want to invest in an apartment. You approach a real estate agent and express your needs. They tell you they have 1000 apartments, and you can choose from one of them.

It then becomes a gamble which one to pick. In the event you make a poor decision, there goes your investment. 

However, they also have another option. They tell you, you can buy a small percentage of each of the 1000 apartments and aggregate them to one.

And since the apartments are in different locations and markets, you get to spread your risk.

Therefore, in the long run, your investment of small percentages of each which aggregate to a whole ensures you have a good return on your investment.

The index fund is no different.

An index fund is an aggregate of stocks or bonds that track and match the performance of an index (the whole market), for example, the S&P 500.

So, there is no human element of tracking and trying to beat the market like a mutual fund.

In the long run, index funds have shown to outperform a human-managed fund.

1) They Have A Better Return On Investment 

In the long term, index funds have a higher return on investment. They outperform individual stocks hands down.

For example, in 2007, Warren Buffet entered The Million-Dollar Bet with Protégé Partners, a New York investment firm. It was a 10-year wager that the S&P 500 index fund would outdo their carefully picked five hedge funds, which they were to trade in for the challenge. 

It is important to note that Buffet used his own money and not Berkshire’s.

In December 2017, Buffet won the challenge and donated the money to charity.

However, his victory didn’t seem assured. On January 1, 2008, the stock market crashed, and the hedge funds swooped in and made a killing hedging.

During this period, Buffets’ index fund fell by 37% while the hedge fund lost 23.9%. 

Nonetheless, from their Buffet beat Protégé in every year from 2009 up to 2014. However, it took four years to come on top of the hedge funds in terms of cumulative return. 

This bet demonstrates that an index fund will weather the ups and downs of the market, and it will eventually balance out and perform better compared to an actively managed fund.

Hence, an index fund is a better return on your investment.

2) Diversification

When you buy individual stocks or bonds, you have uncompensated risk. This is a risk you are not paid enough to take.

So, if a company goes bankrupt, it is downgraded or defaults in borrowing you go under with them. Unfortunately, it happens a lot in the stock market.

To protect yourself, you can invest in an index fund. Just like we have seen, an index fund is an aggregate of all the stocks in the market. 

Therefore, in case one company goes down, your investment does not go under with them. In the same vein, when a company is doing well in the market you also gain and do not miss out.

Eventually, everything balances out in an index fund.

3) It Is Easy

Most people do not know or are not motivated to learn how to invest. They feel it is a drag and a bore.

Luckily, if you are one of them, you have an option, and can invest in index funds without being actively involved.

With index funds, you open an account with an investment management company and commit to making a monthly contribution to your account.

From there, you then leave it and let it grow. 

4) They Have Very Low Fees

Index funds are simple to put together and manage. They do not have overheads like mutual funds. On top of that, the portfolio of stocks is automatically balanced and adjusted, and no human is needed.

With as little as 0.04% annual management fees, all these savings get passed down to you.

However, a mutual fund is different. It has a portfolio manager who handpicks selected stocks and tries to beat the market. 

When trading, they will contract trading fees and management fees. All of these fees add up and will be passed down to you the investor.

Since portfolio managers rarely beat the market in the long term, the investor ends up losing their money.

Therefore, index funds are a much more favorable option, and you get to enjoy low fees.

5) Tax Efficient

Did you know an index fund is more tax-efficient compared to an actively managed mutual fund?

On account, those portfolio managers are actively buying, and selling, they have an estimated turnover of 85%, they pay capital gains taxes on every sale they make. 

This makes actively managed mutual funds one of the most tax-inefficient. On the contrary, index funds are tax efficient. 

In theory, an index fund portfolio, for example, an index fund of the total stock market will only have two turnovers.

That is in an Initial Public Offering (IPO), or when a company is delisted from the exchange.

In these two situations, there are no capital gains made. Consequently, there will be no capital gains tax.

However, in reality, the turnover is about 4% in index funds. Nonetheless, negligible compared to the 85% of actively managed funds.

Therefore, overall, index funds are more tax-efficient compared to other actively managed mutual funds.

6) Easy To Build Your Portfolio

One of the cardinal rules in investing is never to put all your eggs in one basket. As an investor, you have to diversify your portfolio. 

And with index funds, you can do that easily, and quickly.

For example, your investment plan calls for three funds in your portfolio. That is stocks, bonds, and real estate.

To get started, you can buy Total Stock Market Index Fund, and then add bonds with the Total Bond Market Index Fund, and lastly, your real estate through the REIT Index Fund

Therefore, there is no need to worry about overlapping your assets. You know what a fund holds just by its name.

With index funds, you do not need to pay thousands of dollars a year to have an investment manager build your portfolio.

7) Less Time Consuming

In traditional investing, you would need to do your research, and identify well-performing stocks.

You will also need to follow the trends of the market, and try to beat the market.

However, this strategy needs a lot of time, energy, and commitment, which most people do not have.

By investing in an index fund, you free up your time and do not have to track the market. You put your money in, forget about it, and let it grow.

8) Take Advantage Of Market Returns

When you try to beat the market, you may miss some opportunities. 

For example, if you have invested in the total stock market index when the market goes up, you do not miss out. This is because you have invested in the whole market.

However, with a mutual fund, you can only take advantage of gains made in the market if you had invested prior. Therefore, the chances of missing out are very high.

To that end, an index fund makes sure you take advantage of all market returns, and never miss out.

9) No Factor Risks

There are two schools of thought when it comes to investing. There is the Total Market versus the Factor Investing.

In factor investing, you have to analyze what are the drivers of return in a particular asset class. These are macroeconomics and style.

However, in total market investing, you do not have to worry about factors. The structure of the index fund already captures all factors and risks, and there is no need to analyze them.

10) Controls Investor Behavior

Stock trading has been likened to gambling. For example, when an investor makes gains on stocks they have placed their bet on; it produces the same effect as winning in gambling.

Unfortunately, this investment strategy will make you lose money.

But investing in an index fund, investor behavior is controlled. You do not have to keep trading in individual stocks trying to beat the market.

In the end, this protects your wealth and builds you more.

11) Widely Available On Most Investment Accounts

Index funds are as universal as they get. Many investment accounts can be used to invest in them. 

For example, a 401(k) can be used to invest in an index fund, and grow your money for retirement nest.

Or a 529 can be used to invest in index funds to grow your kids’ college fund.

By and large, the type of investment account used will depend on your desired financial goal. However, other factors like tax benefits, the maturity of investment account, among other things should be considered as well.

Other investment accounts you can use to invest in index funds are; Solo 401(k) s, Thrift Savings Plan (TSP), Health Savings Account (HSA), Roth IRAs, custodial brokerage accounts, taxable accounts, and many more.

Achieve Financial Freedom

The road to financial freedom is hard. It requires a lot of sacrifices, patience, planning, and dedication to achieve it.

And one of the surest ways to get there is through index funds. Time and time again, everyday folks have been able to achieve financial independence using them.

With the above advantages going on for an index fund, it is only wise to start investing and achieve financial independence.

Byline:

Hilda Munjuri is a freelance personal finance writer. She enjoys finding new money hacks and investing. Her dream is everyone achieves financial freedom in their lifetime.

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Small Business Investment Opportunities That Aren’t Risky

There are many business investment opportunities that can give you a chance to be your own boss. Being a handyman is one of them and the best part is that your investment and risk are minimal.

Are you tired of working for somebody else? Well, if that is the case it might be the time to put your entrepreneurship skills and ambition to good use. Many would like to start their own business. However, it is easier said than done. Starting a new business demands funds and specific skills. At first, this might sound intimidating but hold on! Don’t give up before you even started. There are some great small business investment opportunities for you. All these suggestions demand minimal investing, which minimizes your business risk.

How To Put Your Handyman Skills to Good Use?

Some people just have a knack for fixing things. So, why would you put those skills to good use? To be an official handyman you might need to obtain a license and you might need to get registered. These types of regulations are largely dictated by the state that you live and work in. Your startup costs would include tools. In addition to tools, you need to be mobile. The best vehicle for a handyman is a pickup truck.

Appliance Repair Specialist

In order to pursue this business investment opportunity, you need to be a handyman with a supplementary set of skills. Therefore, you would need to have knowledge of appliances and their inner functioning and mechanisms.

Appliance Repair Specialist business

To fix appliances you must have a greater understanding of how they work.

Smartphone Repair Expert

We all have smartphones and we drop them, hit them and do all sorts of things that might damage them all the time. Thus, it is no surprise that smartphone repairs are in demand. Investing in a toolset might be all you need if you have the necessary skills. If not, you might need to take a course. Be aware that the demand is there, but so is the competition. Big producers of such hardware, like Apple and Samsung, will be your biggest competition. Still, you can be very successful in this line of business, but you might need to start off with lower prices in order to attract new incoming business.

Smartphone Repair Expert investment opportunity

People have their entire life on their phones, so imagine their panic when it gets broken. The demand for smartphone demand will only continue to grow.

Business Investment Opportunity in Web Development

Many business owners are too busy to work on their business’ websites. Also, some might not have the skills even if they had the time. You would need to write content, make sure the information on the website is up to date and all other activities that are included in website maintenance. To do this you would need to have some sort of background in this or similar field. The great thing about this business option is that you can work from home, which is a pretty great workplace benefit.

Pour Your Creativity into Your Own Blog

If you are a word wizard, becoming a professional blogger is an excellent business investment opportunity for you. You would write a blog about something that you know and something you are passionate about. For example, if you are an expert in all things beauty related, you will not start a blog on digital marketing. You will write about everything related to beauty. The way you will make money is through direct advertising. The more eyeballs you have on your blog, the more advertisers you will attract. This is another great business opportunity that can come to life from the comfort of your home.

Resume Writer

Your resume is the first thing your future employer sees that represents you and your past business ventures. Of course, you want it to be as impressive as possible. In today’s tough and competitive job market, people are willing to pay good money for professional assistance on their resume. To do this, you must have good writing skills and some type of knowledge of editing. It might take you time to build up a client base, but once you get the ball rolling you will have clients coming at you left and right.

SEO Expert

SEO experts are focused on your website’s content and your SEO ranking. The following obligations fall under this popular job description: keyword analysis, Google Analytics, writing content, staying up to date on current SEO trends and strategies, etc. To be able to run this type of business you would need to have related prior experience. Nevertheless, there are classes that you can take, but you will have extra costs related to your additional education. Once your business takes off you will need a website for marketing purposes. The great thing is that you will know how to work on your website’s SEO ranking.

Wedding Planner

Those that have a background in hospitality or event planning might have a bright future as wedding planners. If you top that with great communication skills and a bubbly personality, you are golden. However, be aware that wedding planners are always on the move. You cannot do food tastings and venue research from home. Also, weddings die down during the winter months. Yet, this is not true for cities like Los Angeles and Miami that are warm all year round. Thus, you might want to move if you plan on seriously entering the wedding planning business. For those that need professional and reliable assistance during their relocation visit movingkings.com.

Wedding planning for small business investment

Put your communication skills to good use and start a wedding planning business.

Professional Photographer

You can be a general photographer, but you can also specialize in something. For instance, you can be a wedding photographer or a fashion photographer. For those that want to dive into this business investment opportunity, but they do not have relevant experience, they can start off as an assistant to a more experienced photographer. Professional equipment can be expensive, but once you invest in it, you will be covered for quite some time. Investing in this type of equipment would be a great way to spend your last bonus check.

Do You Have An Idea on How To Turn Your Skills into Cash?

As you can see there are many small business investment opportunities that do not carry a big risk. It is important to realize that every investment carries a certain amount of risk, so you always need to think twice before diving into a business opportunity. It doesn’t matter how small or big it is, always keep your eyes wide open.

There is no doubt that you will pick the best possible business venture to dedicate yourself too. Make sure you are dedicated, determined, persistent and patient because every business will demand these qualities out of its business owner. Happy investing!

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Should You Invest in Single or Multi-Family Rental Property?

Choosing the right investment property is a very personal endeavor—and one that should not be taken lightly. Is it better to go with a single-family property or is a multi-family rental a better option? It is probably the most common question that long-term buy and hold investors ask.

And there is no straightforward, easy answer.

When you are looking for the right place to invest your hard-earned money, you have to carefully consider all the choices available to you. There are advantages and disadvantages to each. Because of this, each investor should approach the matter systematically weighing the benefits based on their own needs, portfolio, and financial goals.

Single-Family vs. Multi-Family Rentals

Single-family properties are not only stand-alone homes. They can also include condos and townhomes as well. A single unit is purchased or owned, and there is just one tenant (individual or family) living in it. By contrast, a multi-family rental is a residential property consisting of multiple units that are purchased or owned together. One tenant or family lives in each unit, but because there are various units, there are also multiple families in a single structure or property.

Single-Family vs. Multi-Family Rentals

Management of each type of property is often dramatically different. Often investors will hire a property management company to handle most issues, including maintenance, rent collection, tenant issues, and property rental. The investor would need to consider financing, financial goals, and cash flow. However, selecting the right property for your portfolio could prove to be quite lucrative and work to your advantage.

Advantages of A Single-Family Property

When you have multiple families living under one roof, there are bound to be conflicts. Single-family properties remove the tenant-tenant conflict issue because each unit is separate. Maintenance is a very important aspect of any property. A well-maintained property will yield a higher return.

On the one hand, single-family properties are often easier to maintain because there are usually no common areas. However, maintenance on multi-family properties allows you to make extensive repairs in a single blow, such as repairing the roof. Contrast repairing the roof on multiple single-family properties to repairing the roof on a multi-family property where the repair covers several units at once.

From a financial standpoint, investing in single-family properties allows you to diversify your portfolio across various neighborhoods, cities, or real estate markets. The liquidity of single-family homes is much higher than a multi-family property.

Advantages of A Multi-Family Property

For the most part, multi-family properties are, overall, easier to manage. All the units are under one roof which means, maintenance, repairs, and renovations can be done at a single site in one shot instead of having to travel to multiple units that may not even be in the same city. For instance, painting one multi-family property is less expensive and time-consuming than painting several units located in various parts of the city or state.

Advantages of A Multi-Family Property

Rental income is typically higher for multi-family properties simply because there are several units under a single roof. Instead of collecting rent on one or two single-family units, you collect rent from 10 or 20 units, give or take a few depending on the size of the property. That can be a significant boost to your financial profile. This also offers some protection against the risk of not getting any income for a month or even several months.

Should You Consider Investing in Real Estate?

You have to weigh the pros and cons of each property while examining your own financial goals to determine which type of real estate investment is right for you. Several areas to consider:

  • What type of financing are you able to get? Or do you have savings that you want to invest? If so, how much can you afford for a down payment? What can you afford in monthly payments even if it takes some time before you receive rental payments from tenants?
  • How much rental income do you want to receive each month? Can you manage financially if you don’t receive rent for a month or more?
  • Do you plan to maintain the property or properties yourself, or will you hire an individual or company? What about managing the properties?
  • Do you plan to sell the property at some point, or will you buy and hold?

Investing in single-family or multi-family homes can be quite rewarding for your long-term financial goals if you take the time to choose your property wisely.

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