I believe that an investor’s greatest chance to succeed in investing is through buying and holding index funds.
An index is a group of securities (stocks or bonds), which combined, represent a defined market. For example, the S&P 500 is a group of stocks that represent the 500 largest public companies in the U.S.
An index investor owns stocks AND bonds to match their predetermined risk tolerance. A general rule for retirement saving is that an index investor holds their current age in bonds and the rest in stocks.
An investor should plan to buy and hold each index. There is no need to enter in and out of the market because the investor has faith in the long term returns of the indexes they hold.
An index investor understands what they can and can’t control. By concentrating on variables that can be controlled, rather than what can’t be controlled (i.e., short-term returns), index investors increase their chance of success.
Variables that an index investor can control include:
- Asset Allocation – Owning a mixture of stocks vs. bonds.
- Diversification - Owning stocks and bonds across different asset classes. For example, domestic and international stocks.
- Taxes - Minimizing taxes by investing in tax advantaged accounts and investing tax efficiently outside of tax advantaged accounts.
- Fees – Minimizing fees through the selection of funds with low expense ratios.
The principles outlined above, give an investor the greatest chance of reaching their goals.