4 Ways Index Funds Are Perfect for Your Retirement Plan | Smart Change: Personal Finance | #retirement | #elderly | #seniors
All mutual funds, including index funds, have expense ratios, or annual fees you pay for owning the fund. This is usually a percentage of your assets, so if you have $100 invested in the fund and it has a 1% expense ratio, you’ll pay $1 that year. A 1% expense ratio may not sound that bad, but it can get costly, especially as you get more and more money invested in the fund.
Index funds often have expense ratios well under 1%, whereas some actively managed funds can have expense ratios of 2% or more. So even in a scenario where an index fund and an actively managed mutual fund see the same rate of return in a given year, the index fund wins because you’re paying less to own it.
4. Strong performance
Index funds have their ups and downs just like any other investment, but often they outperform many actively managed mutual funds. In 2008, Warren Buffett made a $1 million bet that an S&P 500 index fund could outperform five of the hedge fund industry’s best actively managed mutual funds over 10 years. He won. But he wasn’t always leading the whole way.
With any investment, you have to be willing to accept some risk and trust that over the long haul, you’re going to grow your wealth. While the past isn’t an indicator of future performance, it can be reassuring, especially to new investors, to know that many of the market indexes the index funds are based on have trended upward over time.