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4 Ways Index Funds Help Me Sleep Better at Night

By Maurie Backman - Jun 9, 2021 at 7:36AM

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Index funds aren't for everyone, but here's why one Fool is a fan.

When it comes to investing your money, you have choices. You could buy stocks individually, or you could choose to load up on index funds.

I'm a fan of both. There are certain companies I've done my research on and feel have a lot of growth potential. Plus, some companies pay dividends, and that's a great way to secure an extra income stream -- one you can cash out or reinvest.

But I also think index funds are a solid addition to the average person's portfolio. In fact, here are a few ways they give me some peace of mind as an investor.

Smiling person at laptop

Image source: Getty Images.

1. They lend to more diversity

You'll often hear that having a diverse mix of stocks in your portfolio is important -- it can protect you during market downturns and also help you grow more long-term wealth. The great thing about index funds is that you effectively get to own a whole collection of stocks with a single investment.

If you buy shares of an S&P 500 index fund, for example, it's like owning a piece of the 500 largest publicly traded companies. It doesn't really get much more diverse than that.

2. They tend to grow with the broader market

Index funds allow you to capitalize on broad market growth -- and that's something I appreciate. Going back to our example, if you invest in an S&P 500 index fund and that index gains value, so too will your portfolio.

On the other hand, it's more than possible for the stock market to perform well one year on a whole, but for an individual stock you hold to do poorly and lose value.

3. They take decision-making out of my hands

Though I've chosen my fair share of stocks through the years, I'll admit that doing so can sometimes be a little stressful. And that's coming from a place of knowing what to look for in a stock.

The great thing about index funds is that they take the pressure off. When you buy index funds, you get no say as to which companies you own. That can be a good thing.

4. Their fees are really low

As someone who owns different mutual funds, I'm no stranger to paying investment fees. But that doesn't mean I like doing so.

Index funds tend to charge really low fees. The reason? They don't employ funds managers to oversee things. Rather, they just follow a market index that already exists and call it a day.

Fees are something I tend to worry about, and I'm always paranoid that I'm paying too many, so index funds alleviate that concern.

Are index funds right for you?

Some people aren't big fans of index funds because they don't allow you to beat the broad market. If that's your goal, then you'll need to assemble a portfolio of stocks you select yourself. But if you can get past that and learn to be happy with matching the broad market's performance, then there's much to be gained by putting at least some of your money into index funds.

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