Four Benefits of Index Fund Investing

At One Day In July, our core service is managing diversified portfolios for clients utilizing a collection of low-cost index funds. Portfolios are constructed with your specific time-horizon and risk tolerance in mind, and we provide fiduciary financial advice on the Charles Schwab advisor platform.

Below are four important benefits of investing in index funds:

1. Attractive Investment Returns

A large body of academic work shows that investors in index-funds tend to outperform their actively managed mutual fund counterparts over time. See data here. On a related note, historical figures suggest that index funds have a substantial probability of outperforming speculators and individual stock pickers over time. See data here.

2. Tax Efficiency

Index funds are tax-efficient investment options, which is primarily a result of limited buying and selling occurring within the fund. Actively managed mutual funds can have substantial turnover rates, handing significant taxable distributions over to investors on an annual basis. Taxation should be considered when evaluating overall investment performance and returns.

3. Diversification

Index funds provide exposure to hundreds, and sometimes thousands of securities in a single fund. This helps lower overall portfolio risk through broad diversification. Various index funds can be utilized to invest in large asset classes, such as US small-cap stocks, real estate, international markets, and value-oriented equities.

4. Cost

Index funds are typically far less expensive than the average mutual fund. Many financial advisors do not promote index funds, as they can be compensated additionally through higher-fee mutual funds and commissioned-based products. See here.