Investing in Index Funds: Keep Expenses Low!

I feel that most investors can end up doing just fine with index funds. Index funds track a benchmark of stocks, and since they simply track the benchmark they are not actively managed.
Many studies have shown that most professionals in stock selecting do not even beat this benchmark consistently.

The reason why most index funds are so good is that their expenses are much lower than actively managed funds. Many index funds will charge between 3-5% of your upfront deposit. This means that if you buy $1000 of a mutual fund with a 5% charge, you are really only investing $950. Lets say that this mutual fund along with the index both earn 10% in a year. Your actively managed mutual fund will be worth $950 times .1 = $1,045 while the index fund, since it did not charge the initial 5% fee, would be worth $1000 times .1 = $1,100. This makes a BIG difference over time.

For people who want to make investing as easy as possible, I would recommend investing a percentage of their age into a bond index fund, and the rest in a stock index fund, possibly with international index funds as well. For instance, I am 27 years old, I should invest 27% in a bond index fund and 73% in a stock index fund.

Vanguard and TRowe price are 2 companies I highly recommend. If you have over $1000 to invest at once vanguard's Total Stock Market Index (VTSMX) with an expense ratio of .15% is the way to go. If you need to start slower, TRowe Price allows you to invest as little as $50/month with nothing to start. POMIX is TRowe Prices total stock index, which has an expense ratio of .4%.

In conclusion, automatically investing each month in a Roth IRA, and investing in index funds is a simple and effective way to invest.