Should you add INDEX FUND to your Portfolio?
Legendary investors like Warren Buffet and John Bogle believe that picking stocks is not the best way to grow money in the market for an everyday investor.
According to them, an average person is always late to the party, which means that by the time an average person gets to know about the great stock, it is already overvalued. There is also a lack of information available to retail investors.
John Bogle is the founder of Vanguard Group, the world's first index fund.
Vanguard Group has more than $7 Trillion invested in their funds, more than India's Canada's and UK's GDP combined.
He authored a book called "The little book of common sense investing". In this book, he makes the case for low-cost index funds over active mutual funds as the best way to grow wealth in the market.
John analyzed 355 active mutual funds and compared their performance with that of the S&P 500 from 1970 to 2005.
Over a long period of time, index fund come out ahead because of
- Low Expense ratio: The expense ratio of index funds is generally between 0.1% to 0.5% as compared to active mutual funds which have 0.5% to 2% as the ratio.
- Diversification: Index Funds have diversified exposure to all sectors of the economy, unlike some active mutual funds which can have concentrated exposure to certain sectors.
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