One of my money rules is to invest in Index Funds. Ideally, this can be done using dollar cost averaging. This just means that you can invest about the same amount of money once a week (or at another fixed interval) no matter what is happening in the market. I invest for the long term. This approach has nothing to do with “day trading”.
Why use dollar cost averaging?
First, there is no reliable way to “time the market” so that you’re always buying low and selling high. For the most part, it’s a fool’s errand to attempt this.
Second, your financial health depends on developing good financial habits. Investing a fixed amount at a fixed interval is a great way to build a routine that is going to work out well for you in the long run.
Why invest in Index Funds?
Here are my favorite reasons to do this.
- Choosing which stocks are going to be the best during a given period is notoriously difficult. Most money managers and others who pick stocks build a portfolio that fails to perform as well as a similar index fund.
- Investing should be mindless. The more attention you need to pay to your investing, the less likely you’re going to consistently do what’s needed. Investing in index funds is easy. Because it’s easy, it’s more likely to work out well in the long run.
- Investing in index funds instead of individual stocks means that your risk is spread out. You’re not putting “all of your eggs in one basket”. Again, this tends to produce better results in the long run.
- Investing in Index funds is better than investing in mutual funds because the fees are lower. Therefore, you minimize your expenses associated with investing.
While there are other reasons, I find these four compelling enough to make choosing index funds a no-brainer.
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