Why Index Funds are Better Than Your Hedge Fund

In essence, there are other personal factors that will help determine which the best investment vehicle to use. But if you are starting out as an investor, you can consider starting with index funds; it is cheaper, and easy to understand how it works.

Index funds are ideal for long term investment horizons as low fees and transparency gives you the ability to track market returns in the simplest possible way. Your net returns are much better and its the simplest and cheapest way for DIY investing.

Sensible leverage can sometimes help you enhance returns without worrying about alpha. All you care is market beta.

You get the average upside with substantially less downside. More specifically, you get less downside because you get the benefit of diversification, which dilutes company-specific risk. That increased stability means you care far more sure your investment will be there in the future (even seemingly stable companies can fail fast – see Enron, etc.), or, if you wanted to, you could lever your position (borrow money and invest that borrowed money) without as much fear of downside risk. The advantage of levering is that leverage magnifies upside gains. The disadvantage is that is magnifies losses, which is why keeping gains, but limiting losses is such an advantage.

Only in developed economies investing in index makes sense as most of opportunities (by market share) are already cashed in and most of that remains is to maximize earning from the existing market. And companies in index are experienced at doing it and also they already have big market share (capitalization).

some people say they have benefited from index fund investing because the index takes them into sectors like technology where they are not confident to pick winners. because left to their own choices , they would have missed a lot of upside in these areas.

Index funds offer lower fees for investors than non-index funds. This means that even when a non-index fund outperforms index funds, it must perform better by a certain margin to generate returns that overcome the fees that it charges. One reason for the higher fees is that funds that are actively managed tend to have many more transactions than index funds, which are more passively traded because they stick to an index. And funds’ transaction fees can accumulate.

A central advantage to index funds is that they are relatively low-risk options for investing in stocks and bonds, designed for steady, long-term growth. They are inherently diversified, representing many different sectors within an index, which protects against deep losses. Also, index funds often perform better than the majority of non-index funds that strive to beat the market. For instance, U.S. News & World Report noted in 2011 that index funds tied to the Standard & Poor’s 500 index generated better returns over the previous three years than almost two-thirds of large-cap actively managed mutual funds