Is The S&P 500 Really The Best Index To Track?
S & P 500 Index funds are, by definition, required to invest in the 500 stocks that make up the Index. As such, they mirror the performance of the S & P 500. Investors who are interested in returns based on this index should have an S & P 500 fund as part of their portfolio.
It is not hard to differentiate which mutual fund family has the best index fund, since by definition an index fund seeks to match the performance of a given benchmark: no more, no less. The only real difference between funds is their expense ratio. Thus, the index fund with the lowest expense ratio will always be the best choice. A mutual fund family that offers an index fund as well as other top performing funds would be the most intelligent choice.
The Vanguard 500 Index Fund (VFINX) has one of the lowest expense ratios (.44%) and is widely recognized as the leader of the S & P 500 funds. For the current year (March 2009-March 2010) the fund returned a 49.77%
profit which was right in line with the S & P 500 Index.
While the fund had an impressive one year performance, it has not performed very well over the last ten years. A $10,000 investment made on March 31, 2000 and not touched, would only be worth about $9,300 (March 31, 2010). This reflects the wide fluctuation in the overall market and the funds inability to actively manage the portfolio of 500 stocks.
Now, if you are going to hold a fund for 40 or 50 years, stocks have historically returned an average of 10%-12% over a long period of time. The problem for short term investors (even 10 years) is that if the fund goes down 50%, it has to rise 100% for you to get back to even.
So, think carefully before you part with your money. An index fund may or may not be your best choice.
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