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Index Funds are a Great Way to Diversify a Portfolio


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    If you are like me and are saving for the future but don't have the time (or desire) to play an active role in the day-to-day of the stock market then devoting a decent portion of your portfolio to index funds could be a smart way to go.

    My wife and I are still relatively young and, barring an unforeseen windfall of money from a fairy godmother, will likely be working for a couple more decades. We've been working with our financial manager for a number of years now and have a large portion of our portfolio devoted to index funds because they can potentially be used as a buffer if some of our high-risk investments went sour.

    Index funds aren't a single stock, but a "basket" of stocks that tracks an index, namely the Dow Jones Industrial Average or S&P 500. So if the average of the index goes up then your overall investment increases and if the average of the index goes down then your overall investment decreases, but typically at a much lower rate than if you had a large portion of your investment in a handful of stocks that all went south around the same time.

    So, unless you are a very active trader who loves the day-to-day of investment trading then investing a decent portion of your portfolio in index funds may be the way to go. They could save you a lot of heartache during market turmoil and, while they aren't as "exciting" as the hot-button stocks of the day, they are almost always a safe bet when it comes to investing for the long-term.

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    Agreed. If you are looking for a solid return on an investment and have already decided to invest in the stock market in general, this makes a lot of sense. For all the reasons you outlined. Really just depends on how comfortable you are with taking risks, and how hands-on you want to be with your investments. And how long you want to invest. If you don't like taking big risks, want to be as hands-off as possible (within reason) and are cool with long term investing, definitely seems like this should be a sizeable % of your portfolio for sure.

    Historically, 'safer' index funds can net you somewhere in the ballpark of 10% annually, but of course that can vary by several % points any given year, depending on the health of the overall economy. The longer you keep your money in, the more you should expect to see something like that average return. As your money will ride market highs and lows over the years and decades. But you should be mindful of where the overall economy is still, I would say.

    Do you have any fears or misgivings keeping your savings in the market right now, given the state of the economy?

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    Thanks for sharing. Never gave this option much thought to be honest, mostly because I wasn't really savvy with the many ways you can invest. I've only ever bought stocks myself, and thought about reinvesting recently. That was until this year came to our front door. I soon thought differently, and decided to hold off. However, Index Funds would be the way to go if I were to get back into the stock market. You're right, it does seem like a lot less risky of an endeavor.