If You Can't Beat 'Em, Join 'Em and Investing in an Index Fund

Investing Tip #13

It’s easy to delude yourself; in one study, 90% of Swedish drivers rating themselves above average although basic mathematical low tells you that almost half of these people must be statistically incorrect. In the world of money management, this same tendency to be overly optimistic causes many investors to continually try to beat the markets by selecting their own investments when they don’t have the ability to truly analyze the financial characteristics of different firms (many don’t even know the distinction between depreciation expense and accumulated depreciation).

If this describes you, the best course of action may be the old saying, “If you can’t beat ‘em – join ‘em” and start dollar cost averaging into a low-cost index fund that tracks either the Dow Jones Industrial Average, the S&P 500, the Russell 2000, or any other index that fits your fancy. The costs are often miniscule compared to actively managed funds – after all, there isn’t the need to pay hundreds of analysts to sit around and read reports or issue statements on their opinion about next month’s factory shipments. This cost advantage, couple with the low turnover rate of most index funds, often leads to superior after-tax performance. This approach won’t win you any new friends at cocktail parties, but the empirical evidence shows that over long periods of time, it is very likely to leave your pocket book much fatter than it would have otherwise been.