Do you have index funds in your portfolio? Chances are you do!

Our retirement headline today describes the rise of index funds over active funds and why that’s important.

Outline of This Episode

  • [1:22] Index funds have grown exponentially over the years
  • [2:23] What are index funds
  • [5:58] How index funds fit into my investment philosophy
  • [10:04] Will my estimated Social Security benefit decrease if I retire before full retirement age?

What are index funds?

Jack Vogel and Vanguard introduced the first publicly available index fund in 1976 and despite initial skepticism, index funds’ popularity has grown over the years.

Index funds attempt to mirror an index–a benchmark. You can’t invest in the S&P 500 since it is simply a list of companies, so an index fund takes your money and attempts to invest it in a way that mirrors that list.

How to use index funds in your portfolio

Using index funds is a very passive way to invest. You’ll want to make sure you use a buy and hold strategy rather than buying and selling in the way an active fund is managed. This simple buy and hold strategy makes index funds an inexpensive way to invest.

Most investors can build a well-diversified portfolio for only 10-25 basis points by using index funds. Rather than trying to beat any share of the market, an index fund is simply trying to match it. Although active funds often try to outperform the market in some way, they underperform about 80% of the time!

My thoughts on passive investment funds

Passive funds fit with my overall investment philosophy: buy the best companies in the world, buy them as cheaply as possible, and hold them for as long as possible.

The article highlights the financial advisory industry’s transformation due to the popularity of index funds. While some advisors initially feared obsolescence, the industry has adapted by focusing more on clients’ needs by providing holistic financial planning and personalized services.

It’s fascinating to me how the industry has changed over the past years. 20 years ago a financial advisor’s role was to invest your money, now we offer a much more holistic experience that greatly benefits consumers.

In conclusion, this article underscores the importance of anticipating and adapting to disruptive changes in the marketplace while advocating for a proactive approach to embracing innovation rather than passively reacting to it.

Resources & People Mentioned

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