If the time ever comes when Americans do have a hand in directing where a portion of their Social Security dollars are invested, index funds could be a favored product. But before jumping on that let-me-do-the-investing bandwagon, keep in mind that not all index funds are created alike. Nor is everyone interested, able and capable of making long-term investment decisions for themselves.
The financial press has done a great job of raising the awareness of things like stocks, bonds and mutual funds to the American public over the past 15 years. And so have corporations. Thanks to the explosion of 401 (k) retirement plans, more employees than ever before have been forced into learning about long-term investing and making their own investing decisions.
But talk to the millions of folks not participating in their firm's 401 (k) plans, working for small companies or businesses not offering any types of retirement plans, or, those who don't read the business sections of their home town newspapers or any of the financial magazines around and you'll find many more millions don't know anything about the basics of investing.
"I don't even know what a mutual fund is, " says a Minnesota home-maker who didn't wish to be identified. "All the money we bring in goes to raising our kids and keeping a home. Not for investing."
So there is plenty of ground that needs to be covered before many Americans will feel comfortable investing any portion of their Social Security dollars in the market. But for now, one easy way for novices to get exposure to stocks---which historically have provided investors with the best long-term investment performance--- is through index funds.An index fund is a basket of stocks that mirror the performance of an index, such as the S&P 500.
But it's not that easy----there are lots of choices.
There are now nearly 280 equity index funds in Lipper's data bank. Some invest in the S & P 500 Index, others invest in small, mid-cap and foreign indexes, etc.. And, while there isn't a NASDAQ Index fund around, new to the market is a Wilshire 5000 index fund in which investors get a total market representation.
Investment objectives range from the most familiar---the S & P 500 type funds----to those with growth, growth and income, gold, utility, science and technology, international and different market-cap objectives. That means there's much more to selecting an index fund than most investors think.
"What investors need to remember is that not all index funds are created equally, " says Stephanie Kendall, a mutual fund analyst at CDA/Wiesenberger. "Some funds are specifically indexed on a one-to-one ratio so to speak like the Vanguard 500, but there are lots of others that are highly leveraged. For example, the Pro Fund Ultra OTC is supposed to have a beta at two times the NASDAQ 100. So it's supposed to do twice as well as the NASDAQ 100. But it could also do twice as poorly, too."
A. Michael Lipper, chairman of Lipper, Inc., said that investors ought not jump into an S & P 500 Index fund and think that they are going to have a winning investment all the time. "Over the last few years, the bigger the market cap the better. But there will come a time when the S & P will under perform other funds."
So index fund diversification comes into play.
Because indexing is a low-cost tax efficient way to get exposure to any number of different markets, investors ought to spread their investment dollars around, said Bill Klipp, executive vice president of Schwab Funds.
"We encourage investors to have exposure to a number of different asset classes. So they might own an S & P 500 fund or Schwab 1000 fund, but also have international and small-cap representation," he says.
In the end whatever your politics, just as index funds aren't all alike neither are our individual interests in investing.
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