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The pros and cons of index investing

Feb 19, 2013, 10:58 a.m.
Tips, pros and cons on investing in index funds.

Index investing is based on the concept that the stock value of a group of companies can better represent the overall stock market's health than any single stock. Common indexes include the Dow Jones Industrial Average, the S&P 500 and many others. For example, when the Internet flurry began in the 1990's "dotcom" era, analysts created a "new economy index" that focused heavily on high tech firms.

Not every investor is a fan of index investing. Here are some pros and cons to consider.

PROS

Investing in an index is generally safer than trying to pick individual company stocks. An index smooths the ups and downs companies included in the index are bound to experience. You don't have to spend your time trying to pick winners and losers.

Indexes usually provide solid returns and eliminate the need for you to spend hours each day researching the market.

CONS

Some indexes require a high minimum investment, while others (known as ETF's) require that you have a brokerage account, which may lead to financial planner fees and other cost increases.

You need to pick your index carefully. Analysts have created hundred of indexes and many of them are so narrow they don't reflect the overall market's health. Investigate the index you're considering carefully before you invest.

Is index investing a free money finance scheme? No. It's one of the safest forms of investment you can make and one that's likely to deliver good returns on your money if you practice due diligence in choosing your index fund.

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