What is Index Investing and is It Effective?

Asset Protection Group | Oct 16, 2017

Growing one’s assets is a pretty common goal, and yet, there are an infinite number of ways to accomplish that goal. What works for one person might not be exactly right for another, so it’s important to understand your options and choose a strategy that makes sense to you personally.

First of all, it’s important to understand how you view investments in relation to your own personality. Some investors are what we call the “active” kind. These people constantly analyze the market, buying and selling investments at what they anticipate are the “right” times. They might scrutinize a particular company’s growth prospects before deciding whether to invest in that organization, or sell the stock just before a predicted decline.

Others are more “passive”, but don’t let that term fool you. Passive in this case does not denote a lack of insight or strategy, just a different way of applying that strategy. A passive investor analyzes their risk tolerance versus their desire for growth, and then divides their money between different investments depending upon the answers to those questions. This person is looking at market returns rather than trying to “beat” the market.

For the passive investor, index investing can be an attractive option. Index funds are mutual funds designed to mimic a particular market’s return (such as the bond market, the US stock market, international stock markets, and so on). Index investing simply refers to using those funds to build a passive investment strategy that reflects a particular investor’s risk tolerance balanced with their desire for growth.

Why do some people choose index investing? Simply put, active investing is extremely difficult, requires hours upon hours of analysis, and investors aren’t always “right” all of the time no matter how much effort they put into “beating” the market. Index investing helps you to make informed decisions, reducing the stress, hassle, and risk of aggressive investment games.

To answer your other question: Yes, index investing can be quite successful. According to one study by Rick Ferri and Alex Benke, index investing outperformed active investing strategies 80 to 90 percent of the time!

To learn more about index investing, give us a call. We’ll be happy to sit down with you, discuss different strategies, and help you decide upon one that suits your needs and priorities.