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Benefits of Index Funds

Since the managers of index funds are simply replicating the performance of a benchmark index, they don't need research analysts and others to choose stocks, timing trades, etc. They also trade holdings less frequently, meaning fewer transaction fees and commissions.

Once upon a time, back in the analog age, investors could only buy and sell mutual funds through financial professionals: brokers, money managers, and financial planners. But online investment platforms have made traders of us all, and today, anyone with a computer, a tablet, or even a smartphone can buy mutual funds.

A balanced fund is a mutual fund that typically contains a component of stocks and bonds. A mutual fund is a basket of securities in which investors can purchase. Typically, balanced funds stick to a fixed asset allocation of stocks and bonds, such as 70% stocks and 30% bonds.

Buffett's rationale behind endorsing S&P 500 index funds is rooted in their simplicity and effectiveness. He argues that attempting to outperform the market is futile for most investors, and instead, they should seek exposure to the broad U.S. stock market through low-cost index funds.

To be sure, if you have the time, knowledge, and desire to create a portfolio of individual stocks, by all means, go for it. But even if you do own individual stocks, index funds can form a solid base for your portfolio. Index funds offer investors of all skill levels a simple, successful way to invest.

The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.

What is the best mutual fund for retirees? ›

Index funds don't change their stock or bond holdings as often as actively managed funds. This often results in fewer taxable capital gains distributions from the fund, which could reduce your tax bill.

You can learn the basics of investing in index funds in a few weeks," she said — and it's a highly effective way to build wealth.

An index fund is designed specifically to mimic the performance of a selected underlying index that has displayed consistent growth over the years. On the other hand, individual stocks are highly unpredictable and change quickly.

The S&P 500 is generally considered one of the most reliable indicators of the overall health and direction of the US stock market. Investors and analysts use the S&P 500 as a benchmark to gauge the performance of their investment portfolios, as well as the general state of the US economy.