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What Is Low-Cost Investing and Why It’s Important to Your Portfolio

April 23, 2024.

Low-cost investing can be a great way to diversify and strengthen your portfolio, but it’s wise to understand the basics before you get started.

What Makes a Good Portfolio? 

Portfolios will vary greatly from person to person, depending on your financial and investment goals. If your portfolio provides the returns you expect at a level of risk you’re comfortable with, you have a ‘good’ portfolio.

In general, a ‘good’ portfolio has 3 key characteristics:

  • It’s diverse.
  • It fits your risk tolerance. Your investments shouldn’t keep you up at night because they are too risky. But they also shouldn’t be so conservative that you can’t meet your financial goals.
  • It’s cost-efficient. 

These three characteristics make up index funds, which could make them an excellent piece of your portfolio.

What are Index Funds?

Index funds are investment funds that follow and track a benchmark index like the S&P 500, Dow Jones Industrial Average, or the Nasdaq 100. They are also referred to as mutual funds or exchange-traded funds (ETF).

Index funds are passively managed, which means that the fund manager picks one index to track and then copies its holdings instead of individually choosing each stock or bond the fund will hold. That’s why people may refer to indexing as a “passive” investment strategy.

There are many benefits to index funds:

  • Portfolio diversification: Investing in index funds helps diversify your portfolio. Each index fund has hundreds or thousands of stocks or bonds, so if one isn’t performing well, there’s a high chance that another is performing above average, which minimizes your potential losses.
  • Cost-efficient: Actively managed funds cost more because portfolio managers have to spend a significant amount of time hand-selecting stocks or bonds. Since index funds are passively managed, you don’t have to pay for that extra time.
  • Tax-efficient: Index funds offer lower taxes than other investment opportunities. Because index funds are not actively managed, their stock or bond holdings don’t change as often which often results in fewer taxable gains.

Is a Low-Cost Index Fund is Right for You? 

Index funds are a great option for many investors that are looking to further diversify their portfolio in a cost-effective way.

Index funds are broad, so you can gain additional portfolio exposure to certain markets with minimal effort. What’s more, you can easily allocate more money to specific stocks or funds to match your risk tolerance, investment preferences, and investment goals.

Have Questions?  Contact Us!

References

Goepper Bufkhardt.  “What is Low Cost Investing and Why It’s Important to Your Portfolio.  What Is Low-Cost Investing and Why It’s Important to Your Portfolio – Goepper Burkhardt Private Wealth Management (retireto.com).  April 5, 2023.

Source: What Is Low-Cost Investing and Why It’s Important to Your Portfolio – Goepper Burkhardt Private Wealth Management (retireto.com)

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