The Ten Percent Solution

 

Average and Standard & Poor's 500 that we hear about on the radio indexes?"

"You didn't let me finish!"

Roy continued on. "Well, I'll give Dave the benefit of the doubt and say you are both correct. The Dow Jones In-dustrial Average and the S&P 500 are indexes. They are supposed to represent the market—but they don't invest in every stock, just a few. The Dow Jones invests in thirty stocks—thirty market leaders to be more precise. Dave, how many stocks do you think the S&P 500 invests in?"

"Is that a trick question?" I shot back. "Five hundred?"

'Tour mind never ceases to amaze me. That's right. The S&P 500 is made up of five hundred companies—five hundred big companies. With an index fund your money is invested in the stocks that make up the index. As indexing has gotten more popular, new indexes have been created— there's more to indexing than just the Dow Jones Average and the S&P 500.

"Dave, the article that you read is right—few money managers beat the index consistently over a long period of time. It's a competitive business. With an index fund you are assured of at least matching the market. There are other advantages, too. They are generally cheaper than an actively managed fund, which improves your returns. And say you do find the Brett Favre of money management but he leaves or loses his touch. If you don't stay on top of things you may miss those changes. Or say the manager changes his approach to picking stocks. At least with an index fund you know what you're buying— you may not be able to predict the market, but there's no guesswork as to what you're buying. On the downside, when the market goes south, you go right along with it."