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Why Index Funds Should Excite You

Why Index funds should excite


Discover how low-cost funds can be an exciting investment.

I've been told often that my low-cost broad indexing approach to investing is boring, and my "dare to be dull" catchphrase certainly doesn't argue otherwise. Yet simple investing that allows investors to own the entire stock and investment grade bond market with a few index funds at the lowest costs can actually be quite exciting in several ways. How so?

1. It's exciting to pull ahead of the pack. Like many things in life, investing is a marathon, not a sprint. Over the long run, active investing by investment portfolio managers consistently underperforms the comparable index fund. For example, S&P Dow Jones Indices reports that nearly 92 percent of large U.S. stock funds underperformed the S&P 500 stock index over the past five years. By my calculations, the average active strategy has about a 1 percent chance of beating the low cost index investor over the longer term. It feels great to be a master of the universe effortlessly beating the masses of investors that don't get the math.

2. It's exciting to remain calm during times when the active investors are panicking. Active investors, both individuals and professionals, tend to react to dramatic market movements. In late 2008 and early 2009, for instance, many reacted with a mass exodus from the stock market, missing out on the raging bull that followed shortly thereafter. Being calm and collected when markets go sideways gives investors the confidence to rebalance (buy more stocks) after a plunge.

3. It's exciting to achieve financial independence sooner. Indexing yields higher returns, which translates into higher wealth. That wealth will accord you the financial freedom you've worked for or, if you are already retired, allow you to spend more. Either way, you can pursue your passions and lead a more exciting and rewarding life.

4. It's exciting to look and feel younger. Chronic worry in general takes a mental and physical toll, and worrying about your finances is no exception. Anxiety over whether your hot stock will go up or whether your new money manager actually has a clue can cause you to age faster. The indexer, on the other hand, doesn't need to worry about such things. Less worry means you look younger.

5. It's exciting to own the world. Active investors own a mere handful of companies, a few sectors, or maybe a few countries. An indexer who is doing it right owns nearly every public company across the globe. For all practical purposes, there isn't a publicly held company on the planet I don't own a piece of. How many billionaires could make that claim?

After indexing for more than a quarter century, long before it held mainstream appeal, the excitement of index investing is gaining popularity. I am no longer the oddball, at least not when it comes to investing. In fact, about 43 percent of money in U.S. stock funds is now in index funds.

So if owning the entire world, having more money, pursuing your passions, avoiding panic and looking younger sound exciting, consider index investing.

Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.