Should You Consider Index Funds for Your Next Investment?

The concept of indexing is simple: Instead of trying to beat the market, you try to meet the market. But is indexing the right approach for you?

The 1976 launch of the Vanguard 500 Index Fund created an entirely new philosophy of investing: holding all the stocks in the market instead of trying to pick potential winners.

Index funds, as they are called, are thus considered passive investments, and they often have lower turnover and lower fees than actively managed mutual funds.

Today, index funds track all kinds of market indices. There are more than 1,000 index funds and exchange-traded funds (which are similar to index funds) available. Many of them target specific countries (such as China), industries (such as technology), and even strategies (such as long-short investing).

The strategy has often worked. Many studies have shown that the bulk of traditional mutual funds have not been able to keep pace with index funds over time. But it is hard to determine if an index fund is right for you, and if so, which one.

If you think index funds are right for you, you may want to stick with the basics, such as choosing one U.S. stock fund, one international stock fund, and one bond fund.

Or you might use index funds for certain allocations (such as large-cap stocks) and use actively managed mutual funds where manager expertise and research may be more beneficial (such as small-cap stocks).

We can help you determine whether indexing is suitable for you based on your individual financial situation and goals.