Meeting Investment Goals with Index Funds

Reviewed: February 04, 2015
By FinanceWeb

A Wide Variety of Index Funds

Index funds provide a convenient method of duplicating the performance of a particular portion of the market. Careful selection of no load index funds can provide the level of market exposure needed to meet the investor’s goals. There are a large number available, and they differ significantly in holdings and performance. Selection of these investments is no less demanding than picking a group of stocks. Investors must examine the critical information on past performance, investment policies, and distribution of investments within the fund’s portfolio.

Picking Index Funds

When selecting top index funds, trend data is a useful reference point. A series of recent high–yield annual reports is a good indication of continued progress. A longer view of five to ten years can add perspective. However, trend information does not amount to guarantees. Investor experience and understanding can help avoid poor choices, and a healthy regard for news and events is another tool. The structure of the fund, and its level of concentration is a key factor; analysis of past performance is more complicated in diverse funds and simplified by concentrations.

Successful Strategies Add Flexibility

Most funds succeed for one or more reasons, and the level of concentration has a direct relationship. Some high yield funds concentrated in high-performance sectors such as the U.S. shale oil producers in the 2012-14 rising oil price environments. The same concentration became a disadvantage when oil prices fell and continued falling to record lows. A more diverse fund might have balanced shale oil with alternative energy research, solar power, and coal. Concentration reduces the margin for softening losses. Concentrated funds require frequent reviews

Diversified Funds Reduce Risks

Broad and diversified funds are more attractive in periods of volatility. Many indexes lack global diversity; some are based exclusively on U.S. corporations. Among global indexes, some limit their scope to particular geographic areas or categories. For example, a fund might focus on emerging markets or a classification such as the BRICs. A BRIC fund might have experienced significant losses on low oil revenues in Brazil and Russia, but those losses might have been softened by gains in other Brazil sectors such as airlines and tourism. The economies grew and gained significantly for oil consumers like China and India driven by falling oil prices and increased consumer activity.

Assessing Portfolio Performance

Index funds offer a wide variety of options, and they are keyed to succeed under various conditions. The measure of any investment is the investor’s goals. Many investors emphasize particular advantages such as capital growth, equity, high income, or low risks. To maximize success and minimize risk, investors must assess the performance of their portfolio periodically and make adjustments according to the results. Whether taking a long or short view of the market, performance indicates progress towards the investment goals. When faced with poor performance, investors must consider changes.

Market Conditions Affect Choices

When revising investments, one may decide to stay with index funds as a primary part of the plan. However, market opportunity can indicate better options in actively managed funds. The basic advantage of actively managed funds is an ability to change as needed. Some actively managed funds are designed to minimize volatility, and all have an active policy to adjust the mix of portfolio items and use cash reserves to capture market movement. Dividend and income funds help balance a portfolio in another important way; they provide increased flexibility. When considering changes in a portfolio focused on index funds, one should also consider other types of investments. The best investment package may include top index funds but may also indicate high-performance managed funds.