The personal finance literature and independent advisors recommend putting your investments in an index fund. What is an index fund
An index fund is a fund that follows an index. An index is an economic indicator that shows how the market is doing. For example, the S&P 500 is an indicator that shows how the biggest 500 companies in the New York Exchange are doing. An S&P 500 index fund would put your money in the stock of those 500 biggest companies.
It’s the best option because it’s passive management and because no one beats the market.
Passive management means that the fund can be automated and wouldn’t need any financial analysts to actively manage the fund (try to predict which stocks will go up and invest in them). Any fund that needs active management will have to charge more fees to pay their financial advisors. Because passive funds don’t have that pressure, they charge less fees and your investments are maximized.
Another reason is just data. According to expert Robert Arnott, founder of Research Affiliates, from 1984 to 1998, out of the 203 actively managed mutual funds with at least $100 million in assets, only 8 succeeded in having a higher return than the S&P index (or the market). That’s less than 4% of actively managed mutual funds beating the market!
This shows that the investor who follows an index and keeps his money in the market will benefit from the unexpected ups. Instead, actively managed funds take your money out when the stocks are down, trying to avoid losing money but because they can’t predict the future, they can’t profit from the unexpected ups of stocks.
That’s why it’s better to keep your money in the market, following an index through tough times instead of trying to choose the stocks that will go up. Like we saw, less than 4% of the funds that tried to do that succeeded in beating the performance of the S&P 500 index.
This information was summarized from the book Unshakable by Tony Robbins.