The magic of Index Funds[Finance Fridays]

A simple and low-cost way to invest your money.

Feb 18, 2023

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On Fridays, you get posts about money 💲💰💰💲. Expect a mix of posts on personal finance, breakdowns of the most relevant events in the Tech Industry, and insights into the unique workings of the tech industry. 🔍🔍. Use these posts to master the money game, and solidify your finances to ride out the meanest of recessions.

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We’ve been doing a lot of news and finance concept overviews recently,

So I figured I’d do a post on personal finance to mix things up.

In this post, I will share some information about one of the best investment tools for anyone looking into investing and personal finance.

So many of my friends have reached out to me and asked me “I know I should invest. But what should I invest in? Apple? Crypto? Gamestop? There are so many options.” If you’ve asked yourself this question, keep reading because I’m about to share one of the most solid answers to your question.

Understanding Index Funds

What are index funds- An index fund is a type of mutual fund or exchange-traded fund (ETF) that tracks a specific stock market index, such as the S&P 500 or the Dow Jones Industrial Average. Rather than actively selecting individual stocks or trying to time the market, index funds aim to replicate the performance of the index they track.
An example- Let’s say you really like me. So you decide to invest in companies that I am involved in. That would become a Devansh Index Fund.
Benefits of Index Funds- Index funds offer a range of benefits, including low fees, broad diversification, great returns, and long-term growth potential. This is why every finance person and their mom recommends them. Let’s go into more detail on each of these benefits.
Why Index Funds are Low Cost- Index funds are created based on a predetermined rule (for example S&P 500 tracks the 500 largest companies on the American Market). So these funds can be managed and updated by a computer, w/o needing human intervention. This means that you don’t have to pay fund managers very large fees.
Why Index Funds help lower your risk- When you invest in one company, you’re trusting a bunch of strangers. And as we showed with the FTX saga, no matter how good those strangers look, there’s no guarantee they aren’t committing fraud. So there is always a risk. However, by tracking an entire market index, they are inherently diversified, spreading the risk across many different companies and industries. This helps to reduce the risk of any one company or industry negatively impacting the portfolio.
Great performance- You might think that index funds won’t give you performance worth investing in. Some of you might be tempted to go to Wall Street and let a fund manager handle your investments instead. However, for most people, index funds are actually great. There is an infamous bet in the investing community. In 2008, the legendary investor Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds' performances couldn't justify. Protégé Partners LLC accepted, and the two parties placed a million-dollar bet. The result- index funds had net higher returns.
Potential for Long-Term Growth- Index Funds are inherently less volatile than individual stocks. Thus, it makes it easier for investors to stay in the markets when times get tough, which is the most important part of making money through investing.
Counter-point- As with all things, index funds have their downsides as well. The lower risk is great, but this also means lower returns. That is just the nature of the beast. Depending on your needs, you want to do your research and design your portfolio allocation accordingly. The funds you invest in, and the amount of money you allocate to funds as opposed to other assets, will be based on you and your needs.

Index funds are easy to understand and accessible to investors of all levels. Most platforms let you trade them. Since they are designed to track a specific index, investors do not need to have a deep understanding of individual stocks or the market as a whole. This can make them great for people who want to invest without thinking too much.

That is it for this piece. I appreciate your time. As always, if you’re interested in reaching out to me or checking out my other work, links will be at the end of this email/post. If you like my writing, I would really appreciate an anonymous testimonial. You can drop it here. And if you found value in this write-up, I would appreciate you sharing it with more people.

For those of you interested in taking your skills to the next level, keep reading. I have something that you will love.

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