No matter what promises your investment advisor makes, the truth is that no one can predict what the stock market will do in coming weeks and months.
Timing your purchase of individual stocks is even more difficult. However, there is one pattern that has proven reliable since the first trades were made on Wall Street over two hundred years ago: over the long term, the market has a history of rising.
Of course, this presents a challenge. It simply isn’t practical to purchase an ownership stake in every company on the exchange. Fortunately, there is a well-known solution: index funds.
These products are designed to track the movements of the stock market, sectors, or industries without you paying commissions to own each one.
The Advantages and Disadvantages of Investing in Index Funds
One of the biggest advantages of index funds is the low fees.
Since these investments simply track the market, they don’t require active management. You can expect to find expense ratios as low as 0.03%, which is a significant savings over the 1 percent to 2 percent you will pay with an actively managed fund.
The biggest disadvantage of index funds is that there is no way to know when you might see returns.
The economy runs in cycles. Recessions can last 18 months or more, and expansions may last close to a decade.
If you have short-term plans that require specific returns, an index fund may not be the right choice for you because the value of your investment can go down at any time, and it can be years before your balance recovers and then grows.
If you can afford to wait out the market, these are five of the best Schwab index funds available:
Schwab Total Stock Market Index Fund (SWTSX)
If your goal is to mirror the returns of the stock market, the Schwab Total Stock Market Index Fund (SWTSX) is an excellent option.
This index fund invests in all of the companies that contribute to the total value of the market, so you have exposure to large, small, and micro-cap stocks.
This level of diversification is unusual, as many index funds are focused on big business.
Better still, there is no minimum investment, the fund is no-load, and the expense ratio is a low 0.03%, so very little of your investment will be eaten away by fees.
Schwab S&P 500 Index Fund (SWPPX)
The US exchanges trade approximately 4,000 stocks, but just 500 make up 80 percent of the market’s total value. The group is collectively known as the S&P 500.
The Schwab S&P 500 Index Fund (SWPPX) is designed to give investors the same returns produced by the S&P 500.
This index fund is no-load and has a low expense ratio of 0.03%, which means you have an opportunity to own equity in all of the industry-leading organizations without paying substantial fees.
Schwab International Index Fund (SWISX)
Exploring investment opportunities outside of the United States can be quite time-consuming. The Schwab International Index Fund (SWISX) simplifies this process.
Instead of focusing on a single company or industry, this fund tracks the performance of more than 900 large and mid-cap stocks in 21 countries.
SWISX is designed to mirror the MSCI EAFE Index, and historically, it has come remarkably close.
All of the markets included in this index are developed, for example Japan, the United Kingdom, and France. The US and Canada are not included.
This index fund is no-load, and it has an expense ratio of 0.06%.
Schwab 1000 Index Fund (SNXFX)
Schwab is a leader in the financial services industry, and it has developed its own Schwab 1000 Index. The index includes the 1,000 largest stocks in the American marketplace as measured by market cap.
The Schwab 1000 Index Fund (SNXFX) is designed to track the Schwab 1000 Index.
This fund offers a middle ground between the Schwab Total Stock Market Index Fund (SWTSX) and the Schwab S&P 500 Index Fund (SWPPX) in terms of diversifying holdings.
However, it doesn’t perform quite as well as SWTSX and SWPPX.
In part, the lower performance is due to higher fees. While it is no-load and has an expense ratio of just 0.05 percent, SWTSX and SWPPX both offer expense ratios of 0.03%.
Schwab Small Cap Index Fund (SWSSX)
Investors with an interest in small-cap stocks have had great success with the Schwab Small Cap Index Fund (SWSSX).
This product is designed to track the Russell 2000 Index, which is comprised of the 2,000 smallest companies on the Russell 3000 Index. The businesses represented are US-based.
Investors tend to like this fund because it has actually returned slightly higher earnings than the Russell 2000 Index over the 15-year period beginning February 2002 and the 10-year period beginning Feb. 2007.
SWSSX is an excellent opportunity to diversify your portfolio without incurring large fees. It is no-load, and it has an expense ratio of 0.05%.
Index funds are an important investment tool for beginners and seasoned investors alike. They offer an inexpensive way to maximize diversification and harness the power of the market as a whole.