Are Index Funds Really The Safest 'Set And Forget' Investment Option?

‘Just put it all in an index fund and forget about it,' is guaranteed to be the advice you'll get from nonprofessionals if you ask anything related to investing. Index funds are diversified by design, which offsets the risk of having all your eggs in one basket and plenty of them offer decent returns. It sounds like the best ‘set and forget,' route you can take. But is it? New investors often overlook one even better option. 

Some choose hedge funds because they aim to outperform the market, aiming to achieve higher annual returns than the benchmark index fund — the S&P 500. It yielded 10.26% on average, which doesn't seem like a lot, but almost 90% of hedge funds fail to do the same. That gives you a one-in-ten shot that investing in a hedge fund will pay out. 

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In this matchup, index funds come out on top. A similar scenario is likely to play out with real estate, cryptocurrency, bonds and stock picking. Sure, sometimes a particular bet will yield crazy amounts in a short time frame, but in the long run, repeating the same investment would likely get torn to shreds by the S&P 500. Warren Buffett has earned a reputation as a legendary investor, but his Berkshire Hathaway only eclipsed the S&P 500's average by 2.29% over the last 10 years.

Which Index Fund? 

What often gets neglected is the sheer number of index funds. There are approximately 517 index funds in the U.S. alone. So, which one is the best choice for you? Unsurprisingly, the answer is — that depends. Your financial situation, risk profile and goals are unique. And the optimal move to make heavily depends on the ever-changing market conditions. Sometimes, it will indeed be a traditional 60:40 or an 80:20 portfolio setup. Other times, you will need a more nuanced approach. 

Knowing when to exit a position or to which securities to allocate what percentage of the portfolio is the right way to go. You're in this for the long haul so every point matters. A few percent per year, twenty years in a row, could mean a hell of a difference. 

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Of course, it takes expertise and time to monitor the markets and adapt to the changes in real time. If you're lacking in one of those factors but still want to grow your wealth, financial planners are your best bet. It's a ‘set and forget' wealth generation option that's tailored to your exact financial needs and will continue to adapt to them when they change. 

The main gripe with advisors is that they often charge fees to manage your money, which is true. However, studies reveal that families with a financial advisor earn 3% more per year compared to families who manage their own money. Most financial advisors charge a 1% flat fee, meaning you still end up with more. And due to the compounding effect, that single-digit difference becomes colossal after a while. 

Wealth management is only one way financial advisors can help you live a more comfortable life. You can also let them worry about your retirement planning, taxes, and insurance, among other services. 

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