Index funds are a staple for any long-term investor looking for a safe and low-cost investment that has a reliable rate of return. These funds’ performance is tied to an entire category of a particular “index” of assets rather than specific stocks, bringing management fees down much lower than average. Index funds are tied to the market’s performance overall, so they have a much better rate of return on investment than funds that rely on the decisions of a managing investor. Consider that 80% of actively managed mutual funds underperform the market and you’ll quickly see why it makes financial sense to trust indexes. Because of their general scope, there is no one particular index fund that will perform significantly better than others, but here are some ways to decide which index fund will make you the most bang for your buck in 2014.
Choosing a Category of Index Fund
There are two basic factors to consider when choosing an index fund. First, decide which type of asset class you want to put money into. There are many indexes tracking many assets, but your most basic choices will be between U.S. stocks overall, one particular type of industry, commodities, foreign stocks, government bonds, or real estate. Once you have decided what type of index you want, your next consideration should be finding a company that offers that type of index with the lowest management fees. When you’ve found a good fund that meets your criteria, let your money do the rest of the work.
Index Funds in U.S. Stocks
The S&P 500 Index is one of the most popular index funds for investing in U.S. stocks. This mutual fund tracks the performance of the top 500 companies in the United States. Three of the top performing indexes for the S&P 500 include the Vanguard 500 Index (VFINX), the Transamerica Premier Index (TPIIX), and the Eclipse Indexed Equity (NIIEX). These three are top performers with accessible portfolio requirements.
If you want to invest in more than just the biggest names, you should investigate the Wilshire 5000 index. This index covers the top 5,000 companies in the United States and offers a range of small, medium, and large cap stocks. Some of the top performing funds for the total market category of these indexes are the Vanguard Total Stock Market Index (VTSMX), the Schwab Total Stock Market Index (SWTIX), and the T. Rowe Price Total Equity Market (POMIX).
U.S. stocks are just one asset type for indexes. Depending on your knowledge level and your financial goals, you might also consider researching indexes in emerging markets, the healthcare industry index, or real estate funds. There are many different ways to take advantage of the reliability of an index-tracking fund, so discuss your options with a financial planner to get the full picture.