Why?
Bad news: you're not the smartest person in the room. Sorry. If it's any consolation, neither am I. I've lost a LOT of money due to my inability to see my abundant limitations.
In the long run, you will not be able to beat the market. The rationale of an index fund is "if you can't beat 'em, join 'em." Vanguard has several big ones, and its management fees are minuscule. There are many others.
Full disclosure: I have money with Vanguard. This is not a solicitation to sell securities. I'm just a shlub on the internet, who may or may not have a clue.
Index fund
An
index fund (also
index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that it can replicate the performance ( "track" ) of a specified basket of underlying investments. While index providers often emphasize that they are for-profit organizations, index providers have the ability to act as "reluctant regulators" when determining which companies are suitable for an index. Those rules may include tracking prominent indexes like the
S&P 500 or the
Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allow for greater tracking error but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.
An index fund's rules of construction clearly identify the type of companies suitable for the fund. The most commonly known index fund in the United States, the S&P 500 Index Fund, is based on the rules established by S&P Dow Jones Indices for their S&P 500 Index. Equity index funds would include groups of stocks with similar characteristics such as the size, value, profitability and/or geographic location of the companies. A group of stocks may include companies from the United States, Non-US Developed, emerging markets or frontier market countries. Additional index funds within these geographic markets may include indexes of companies that include rules based on company characteristics or factors, such as companies that are small, mid-sized, large, small value, large value, small growth, large growth, the level of gross profitability or investment capital, real estate, or indexes based on commodities and fixed-income. Companies are purchased and held within the index fund when they meet the specific index rules or parameters and are sold when they move outside of those rules or parameters. Think of an index fund as an investment utilizing rules-based investing. Some index providers announce changes of the companies in their index before the change date whilst other index providers do not make such announcements.
The main advantage of index funds for investors is they don't require much time to manage as the investors don't have to spend time analyzing various stocks or stock portfolios. Most investors also find it difficult to beat the performance of the S&P 500 Index. Some legal scholars have previously suggested a value maximization and agency-costs theory for understanding index funds stewardship.
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