Is It True That Regular Index Investing Performs Good Result With Low Risk?

Posted by Nick Niesen on November 8th, 2010

There are many mutual funds and ETF on the market. But only a few performs results as good as s&p 500 or better. Well known that s&p 500 performs good results in long terms. But how can we convert these good results into money? We can buy index fund shares.

Index Funds seek investment results that correspond with the total return of the some market index (for example s&p 500). Investing into index funds gives chance that the result of this investment will be close to result of the index.

As we see, we receive good result doing nothing. It's main advantages of investing into index funds.

This investment strategy works better for long term. It means that you have to invest your money into index funds for 5 years or longer. Most of people have no much money for big one time investment. But we can invest small amount of dollars every month.

We have tested performance for 5-years regular investment into three indexes (S&P500, S&P Mid Caps 400, S&P Small Caps 600). The result of testing shows that every month investing small amounts of dollar gives good results. Statistic shows that you will receive profit from 26% to 28.50% of initial investment into S&P 500 with 80% probability.

We must note that investing into indexes isn't risk-free investment. There are results with loosing in our testing. The poorest result is loosing about 33% of initial investment into S&P 500.

Diversification is the best way to reduce risk. Investing into 2-3 different indexes can reduce risk significantly. Best results are given by investing into indexes with different types of assets (bond index and share index) or different classes of assets (small caps, mid caps, big caps).

You can find full version of this article with full results of our tests here: http://fplab.com/node/116