There are many ways you can put your money to work. One of them is by investing in index funds. In this blog, you can read what an index fund is, what the advantages of index investing are and how safe it is. This way, you can decide for yourself whether investing in index funds is for you.
What is an index fund?
To answer that, it is first important that you know what an index is. This is a collection of shares or bonds, for example. You probably know the AEX: the index of the Amsterdam stock exchange, Euronext. This index contains the largest listed Dutch companies, such as Shell, ASML and Adyen.
An 'ordinary' investment fund tries to achieve a better return than an index. For example, by choosing the best-performing shares, bonds or other investments, or by timing the purchase and sale of investments. This is called active investing. Because active funds are managed by investment experts (who must be paid) and often involve many transactions, the costs are high.
When investing in an index fund, it is very different. An index fund aims to achieve the same return as a specific index. Because as an investor you follow an index, you are not constantly busy picking the best investments, or timing your purchases and sales. This makes investing in index funds much less expensive than investing in an actively managed fund.
Diversify your opportunities in an index fund
The major advantage of investing in an index fund is that you spread your opportunities and thus your risk. Have you selected five shares to invest in (that is active investing), and do two of the five perform less well than you had hoped? Or perhaps one of them goes bankrupt… Then this immediately has a major impact on your investments and therefore on your money. The nice thing about investing in an index fund is that such a fund always contains multiple shares, bonds or other investments.
For example, the AEX consists of the 25 largest listed Dutch companies. But there are also indices with many more investments, such as the S&P 500, which contains the 500 largest shares in the US. If, say, 25 stocks perform less well, there are always many other stocks that can compensate.
For real diversification, you need a globally diversified and market-weighted index fund, with which you invest in a global, well-balanced index fund with hundreds (preferably thousands) of shares. This is much less risky than investing in just a few stocks. In addition, years of research show that this also provides greater returns than active investing.
How safe is investing in an index fund?
It is important to know that you always take some risk with investing. That includes index investing. After all, if the world economy takes a dip, you will still feel the effects if you invest your money in a diversified index fund.
You don't like big risks, but you do want more return than on your savings account? Then index investing might be for you. The chance of losing a lot of money is much smaller than when you invest actively. This is because of the low costs and because you spread your chances. So make sure you choose a globally diversified market-weighted index fund with hundreds or thousands of shares.
Simple & fully automated index investing with Flow
Another advantage of investing in index funds: it's simple and straightforward. And it's even easier when you invest in an index fund using Flow. Flow recently started working with Meesman, who were the first to introduce index investing in the Netherlands in 2005. Now you can automate your investments, so you don't have to worry about them anymore.
Would you like to invest in a well-diversified, global index fund from your couch and finally build up your capital in a structured way? This is easy with the flows that we have set up with Meesman. Here you can read more about index investing with Flow and Meesman.