If I weren’t a dividend investor who enjoys the hunt of picking stocks and building my own dividend portfolio, my money would be squarely placed in ETFs.
Forget the stark mad, screaming pundits on financial TV shows squawking about the hottest gainers of the moment. Forget chasing the latest headline capturing investment trend — I’m looking at you Bitcoin. Think you’re going to make millions playing Rocket League? Forget even the fantasy of cashing in that winning Powerball ticket or inheriting millions from the rich uncle you didn’t know you had.
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For everyday folks, the ones who go to work and receive a paycheck – saving, investing and retirement are inextricably connected. Setting aside money to grow over the long term is the means to achieve the end goal of having enough money to live comfortably after your working days are over.
And while 401(k)s and IRAs, whether employer-provided or personally managed, are critical investment vehicles for long-term investment growth, investors may seek other promising assets in which to place their money. Such is the space where stock index funds thrive.
Simply defined, index funds are a type of passive mutual fund or ETF in which the money in the fund is diversely invested across a list, the index, of stocks that represent a whole market or market segment. Some index funds are constructed to mirror the performance of well-known indices like the Dow Jones Industrial Average or S&P 500 Index. Others may focus on stocks in industries such technology or pharmaceuticals.
Investors are provided two distinct benefits by the diversified nature of index funds: widespread market exposure to optimize the capture of bull runs (stock market returns historically outstrip other investment returns such as bonds) and significantly less vulnerability to single stock selloffs.
This approach is appealing to an increasing number of investors. By late 2016, it’s estimated that more than $1 out of every $5 invested in U.S. equity markets was via an index fund. But there are a lot of index funds out there. Where should the savvy investor, who doesn’t want use free time picking individual stocks, place their money?
The short answer is ETF’s – and you don’t need to buy many of them. Choosing index funds from Vanguard, a pioneer in the development and offering of these funds is a great place to get started. In fact, personal finance news organization Kiplinger recently recommended holding just two Vanguard 500 Index funds in your retirement portfolio.
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