I often hear people say, “I’ve been thinking of investing for some time now, but I don’t know where to start”. That’s a fair statement because, in our modern society, there are so many options, from Exchange-Traded Funds (ETFs) to Guaranteed Investment Certificates (GICs). Everyone should carefully consider an investment strategy before starting. Still, I believe there is one investment account that will fall into most people’s investment strategy.
The strategy is to invest in Index Funds. An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund provides broad market exposure, low operating expenses and low portfolio turnover.
Index funds such as the S&P 500 have consistently outperformed the average investment strategy like treasury bills, bonds or the average mutual fund. Personally, I would consider the S&P 500 to be the benchmark of investment strategies.
The goal is to make money and beat the market, but I cannot emphasize how difficult it is to do so. As the saying goes, if you can’t beat them, join them; invest in Index Funds.
To paint a better picture of why it is better than investing in treasury bills and bonds, I will use TD U.S. Index Fund – I as an example. You can see the performance of the fund for the last ten years below:
The average return for long-term treasury bills is 1,99%, while it is around 4% for bonds.
The difference is quite significant when you compare Treasury Bills, Bonds and Index Funds. Here is how much money you can expect to make with just $10,000 over ten years:
|
Treasury Bills |
2% |
$12,189.93 |
|
Bonds |
4% |
$14,802.44 |
|
Index Funds |
16% |
$44,114.35 |
As you can see, the difference is colossal as you can make over $30,000 more with the index fund than with treasury bills and bonds. Different banks offer different kinds of index funds even though the principle of tracking the financial market index is present for all of them.
What is fascinating about the index fund is that it has been very profitable even though COVID-19 has hit the whole world badly, and many businesses have been struggling for obvious reasons. Even though most countries have gone through full or partial lockdowns and many companies have not worked as they used to, the index fund was still thriving. In 2020 and 2021 (YTD), the TD U.S Index Fund – I made a profit of 17.93% and 5.69%, respectively.
Index Funds are usually low-cost funds as well. The management fee for TD U.S. Index Fund – I is 0.5% which is very good compared to funds actively handled by portfolio managers. It is definitely very attractive for a passive type of income based on the cost and profitability of all the options available. Unfortunately, due to its low management fee, it is not made aware to everyone.
One key factor to consider is that Index Funds are a long-term investment, usually ten years. It doesn’t mean you can’t contribute if you plan to take it out before ten years, but you might want to revise the allocation of your portfolio. Overall, I think a low-cost index-fund strategy is still quite good for an aspiring retiree in today’s environment.
Is this a good bet? History would say so. Of course, past performance is no guarantee of future performance, but it is one of the most vital indicators an investor can use to get a rough range of what outcomes they might see. Let us know in the comment section below if this article has made you want to invest in Index Funds.