Which index fund would you invest in and why?
September 1st, 2010
I am looking to start investing and I have decided that I will invest in an index fund. I dont feel like I can beat the market and like the diversification index funds provide. Would you go with the S and P, Dow Jones, Nasdaq, or another? Why would you choose that choice? Also, can you invest directly in them or do you have to invest in a syder?
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Posted in Best Index Funds | 
Tags: diversification, dow jones, index fund, index funds, nasdaq, syder
For a relatively unsavvy investor I would try to stick with broad market funds, with a preference for ETFs rather than index mutual funds. Depending on your time horizon it would be of value to incorporate some balanced model to your investments including bond exposure. You can achieve both in low cost ETFs. The two best to start with would by SPDR or iShares. I would choose a broad based indice like the DJ US Total Market Index (TMW or IYY), the Russell 3000, which is a broad based index, the 2000 mentioned by a previous poster is a small cap index (IWV), or the S&P 1500 (ISI). iShares also has more balanced allocation funds and target date retirement ETFs, a good balanced ETF being AOM (S&P Moderate Allocation Fund).
Also I always try to remind all investors in index funds that you can expect to under perform the index all the time, the fund will perform inline with the index before fees, but after fees it should lag by about 0.15-0.30%, if it varies by more than that, or outperforms its index there is a problem with the way they are doing their replication and it would be cause for concern.
So you have decided you can not beat the market. That is the only reason why you should invest in an index fund. I would invest in either the S&P 500 or Russell 2000, I would use Vanguard or the lowest cost index fund I could find. What you might consider doing, even though bonds have a lower expected return that stocks most of the time, is put 80% in Vanguard Russell 2000 (the best proxy for the market) and put 20% in a bond index, I would say vanguards total bond index seems good. If you do this, you will undoubtedly do average, which is your goal.
Vanguard has some of the lowest-cost funds around. You don’t need to limit yourself to a stock index fund. They have some great balanced funds like the Vanguard "Star" fund.
I do not know what is ment by a syder. I would not invest in a cap weighted index fund, especially if I wanted diversification. There are some that are not cap weight so much as others. Small cap and mid cap funds are not. The S&P index funds except for one are very much index weighted. RSP is not. It is an equal weight index fund. By the way, it has beaten SPY by a factor of 2 over a 5 year period. But that is not saying much only that it has a -0.77% return versus a -1.92% return.
There is a whole family of mutual funds where all in the family has beaten the S&P 500 index over a 5 year period. And most have a positive return. The only drawback is that they have a load but the fact that they have beaten the so called unmanaged low cost index fund is something to think about. American Funds.