Looking for a low-risk investment option that can still provide excellent returns? Index fund portfolios may be the answer. While there are debates over how many index funds are necessary for true diversification, one thing is clear: historically, index funds have regularly outperformed actively managed mutual funds.
In this blog post, we’ll explore four different index fund portfolios that have proven to be successful in the past and may be worth considering for your own investment strategy.
Does it matter how many index funds you own? Maybe. There are arguments regarding how many index funds it takes to be truly diversified. Moreover, there are also arguments over the optimal number and types of index funds necessary for the best results. However, one fact remains clear: Index funds will regularly outperform mutual funds. The data support this idea.
Try one of these index fund portfolios that beat managed funds:
1. 100% S&P 500 index fund. It’s hard to get simpler than a single S&P 500 index fund. Furthermore, many investors invest in this manner. Nonetheless, It hasn’t been shown to be the most effective way to invest with index funds, but it’s still highly effective.
- This simple portfolio Consequently, outperformed 82% of actively managed mutual funds.
- The funds that did outperform this mix of index funds did so by an average of 0.4%
2. 40% S&P 500 index fund
20% international equity index fund
40% US investment-grade bond index fund
- This portfolio conforms to the common recommendation of a portfolio consisting of 60% stocks and 40% bonds. Similarly, the use of an international fund increases the level of diversification by including investments outside the US.
- Historically, this mix of index funds has beaten 87.7% of actively managed funds. However, The funds that did outperform this mix of index funds did so by an average of 0.52%
- Additionally, On average the index funds outperformed the managed funds by
1.47%. - This portfolio outperforms the single index fund example but is still quite
simple.
3. 20% US equity index fund
20% international equity index fund
20% US investment-grade bond index fund
20% short-term Treasury bonds
20% real estate investment trust (REIT)
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- Such as this mix of funds did a little better than the previous mix. It did better than 87.8% of the actively managed mutual funds. The active funds that did better were able to outperform the index fund mix by an average of 0.44%.
- On average, this mix of index funds outperformed the managed funds by 1.10%.
- However, this fund did not do significantly better than the previous example.
4. 10% large-cap US equity index fund
10% mid-cap US equity index fund
10% small-cap US equity index fund
10% REIT
10% developed international equity index fund
10% emerging market equity index fund
10% short-term Treasury bonds fund
10% total bond market index fund
10% inflation-protected securities fund
10% tax-exempt bond fund
- This compilation of 10 funds outperformed 90% of the actively managed
index funds. The average returns of the managed funds that beat this mix
of funds did so by 0.29% - On average, this collection of index funds outperformed the managed
funds by 0.93%. - This is a significant improvement over the other portfolios, but it’s also a
little more complicated.
Greater diversification would seem to improve results to a point.
Spreading your investments over 3-10 index funds seems to be an effective plan.
In contrast, keep in mind that these for instance, only cover a 10-year period. Many of these fund types have only existed for little more than 10 years. Furthermore, Limitations notwithstanding, index funds appear to have a real advantage over managed funds. Any of these portfolios is likely to serve you well.
There are many ways to successfully invest in the stock market. If you’re not currently utilizing index funds, give them consideration. A small basket of index funds can provide excellent returns with a low level of risk.
