Index Mutual Funds

Index mutual funds are a method by which all stocks are bought in an index. A stock index is a slice of the stock market. It may the Standard and Poor's 500 or the Dow Jones in America, or the Hong Kong Hang Seng or the Morgan Stanley Biotech. There are dozens if not hundreds of indexes from the United States and around the world, and indexed stocks are based on how the averages of those indexed funds rise and fall from day to day. It is claimed by many experts that passively managed index mutual or shared stocks outperform actively managed shared funds over a long period of time. If this is true, then the money spent by common fund holders to have their portfolios managed is really being wasted. Management costs of index mutual funds run about one fifth of actively managed funds, meaning that over a thirty or forty year period, a lot of money could be saved by a person investing only in indexed funds. 

Many investors want to only pick and choose their stocks separately. Feeling that their wisdom is more astute, these investors eschew the shared stock fund way of thinking, which is to lump a number of different stocks together, often bound by common economic themes such real estate, biomedical , utilities, etc. Sometimes these individually picked stocks do outperform the bundled model of the shared stock. But spending hours and hours every day becoming an expert in trading is not practical for most Americans. The average person doesn't have time to pore over massive reports or watch the ticker six hours each day so he chooses a mutual fund with which he is comfortable and leaves the management of that fund to someone else. In each of these cases, the shared funds are managed each day by a few managers who may dump or buy stocks, depending on the latest market developments. The result has been that mutual funds have been called the investment of the average Joe. 

A mutual fund indexed or not must be registered with the Securities and Exchange Commission. This requirement enables all investors to have a prospectus available for viewing on each fund, disclosing exactly where each investment is being made as well as information about the fund manager. Shared stocks are now a very popular part of retirement plans such as a 401(k) plan. If a person chooses index mutual funds as the benchmark for one's retirement, the difference over several decades of investing could be profound. But there is a catch to investing in index mutual funds that an investor should be aware of before making the plunge.

Index mutual funds are for the long haul investor. Many people get very skittish about short term losses and the rollercoaster affects of daily market turmoil, and are prone to pull out of one fund and place in another quite frequently. That is a recipe for financial chaos and great loss. In some years an index may not perform as well as investments on individual companies, yet over time, different sectors of the stock market have produced the same results. Translated that means with much smaller management costs index mutual funds will be the much greater profit producing vehicle. 

So the question really boils down to why would a person even mess with spending hours or days trying to decide in which mutual fund to invest when over time indexing is just as effective and cheaper? No fancy and high priced money managers to suck up one's money in administrative fees and no worries about choosing the wrong mutual fund. By the way, do worries about poor market performance and dwindling portfolio values have you down? What if a person's basic needs in life were always assured; a place to live and food on the table? Listen to these words of David: "I have been young and now I am old; yet I have not seen the righteous forsaken nor his seed begging bread." (Psalm 37:25)

There are two ways that a person can invest in indexes. One is through index mutual funds and the other is through what are called exchange traded funds. One of the best known names for these ETFs is Spiders. Spiders are bought and sold just like stocks and a person will have to pay a commission each time one is bought or sold. If a person invests in index mutual funds there can be high minimum investment requirements. Sometimes these requirements can be waived if the investor enrolls in automatic withdrawals from one's checking account into the investment portfolio each month. 

In the world of stock market investing, there are almost no absolutes other than that there will be ups and downs. And when there are perpetual downturns, people who have placed so much value on accumulating wealth often begin to look at what life is really all about. Indexing may not ever save one's retirement or life savings from being wiped out in an economic tsunami that occurs every so often in history. At times like those, more emphasis seems to be placed on family, community and the care for neighbors and friends. Even the once heralded goal of retirement before sixty may have to be scrapped in lieu of working much longer than anticipated. Even the finest money managers on the planet have to sometimes put their heads in their hands and wonder what is truly important besides a tattered portfolio and mansion no longer to be afforded.