Index Investing 101

You invest because you want to grow your money, but that growth can occur in numerous ways. Each investor’s strategy differs slightly – or in some cases, significantly – from the next. You have likely read or heard widely varying advice on the topic, all from people who have succeeded. So it could be said that there is no singular “right” way to invest your money; there is only a way that is right for you.

Your investment strategy might (and probably should) mirror your personality and attitude toward money. We all know those investors who spend hours per day, analyzing the market, reading the Money sections of various newspapers, and watching the news for clues. Usually these investors carefully research individual companies before deciding whether to purchase stocks. They carefully monitor the market, make predictions, and try to buy and sell investments at what they consider to be the right times. We call these “active” investors.

By contrast, some people are what we call “passive” investors. But don’t be misguided by that term. Being a passive investor does not mean that you lack insight into economic matters, nor does it mean that you don’t take the time to craft a smart strategy. It simply means that you have analyzed your risk tolerance, and you have divided your assets between different investments according to both risk and potential for growth. You’re looking at overall market returns, instead of actively trying to “beat the market”.

Index investing is a type of passive investing – but again, “passive” does not denote a lack of strategy. In this case, the investor utilizes index funds, which are a type of mutual fund designed to reflect a particular market’s return. With index investing, you use those funds to build your investment strategy, based upon your risk tolerance and desire for growth.

So why would you choose index investing over more active types of investing? There are many reasons, but remember what we said about active investing being practically a full-time job. Plus, no matter how many hours or how much effort you put into an active investing strategy, you might not be right all of the time. Index investing allows you to craft a strategy that responds, over time, to your investment preferences and needs – but without the constant involvement required by an active strategy.

But does it work? Actually, yes. In fact, index investing has sometimes been found to outperform active strategies.

Again, your investment strategy should be tailored to your individual attitude and style. Give us a call and we can help you determine your risk tolerance, and decide upon an investment strategy that works for your personality and lifestyle.

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