Warren Buffett, the greatest investor in the history of the stock market and one of the richest people in America is attributed as saying that “investors should know their limitations.” There is a simple wisdom in that saying that applies to everyday life; know what you are able to do and what you can’t do, then do the things you can. Ask yourself, if you got a chance to fight with a grizzly bear, would you do it? You say that is crazy because the bear is bigger and would kill you? Ok, it’s probably an extreme example but you get the picture; you realize that you don’t have the ability to fight with a bear and you wouldn’t do it. Well, sometimes it is the same in the stock market and yes, there are people on Wall Street that successfully fight bears and bulls everyday with a great equalizer. Index funds give investors the tools they need to exceed their limitations.
What are index funds?
An index fund is a type of mutual fund that keeps a stock portfolio designed to match the performance of a stock market or one of its stock sectors as measured by an index of selected stocks. Index funds are also known as market funds.
Why are index funds better than going alone?
The vast majority of investors on Wall Street really do not know anything about investing. They don’t define their goals, they don’t learn stock charting and they refuse to perform fundamental analysis on companies before they buy. These are the same investors that don’t understand what happened when they lose their money. There are very few investors that, over the long haul, out-perform the results of the major indices like the Dow, the S&P 500 or the Vanguard Total Stock Market Index.
Index funds such as these and others give the average investor the ability to exceed his or her limitations. These funds are diversified portfolios and represent investment options in a portfolio with a size only a few investors could match. Because they have such a large portion of the market represented in their portfolios, it is extremely difficult to outperform index funds over the course of a year, let alone 10 or 20 years.
What if I want to do it on my own?
That’s one of the beauties of the stock market; no one can tell you that you shouldn’t be playing the stock market. But if you hope to have success at it, you have to commit yourself fully to the endeavor. Winning the stock market game requires an understanding of the basics of stock market investing, a clear stock trading plan and the best resources available.
The first thing you need to do is start learning about the stock market. Start with Benjamin Graham’s book on defensive investing, then read anything you can about Warren Buffett. Both of these men are giants in the world of investing and because of their stature, their views demand a certain level of respect. Your learning should also include an ever-increasing understanding of the stock market terms and techniques of Wall Street. You need to understand Wall Street news and how Wall Street talks and acts in order to recognize its characteristics.
Second, you need to develop a plan for your investing. Define your goals and identify a course for getting there. Want to trade stocks? Make your plans accordingly. Prefer the idea of futures markets or options trading? Those are good possibilities as well. What are your stop loss strategies? Knowing these things will help you make a plan that increases your chances for success.
Finally, you need a stock trading system that will help you track your investments as well as your potential purchases. The best system for this is Japanese Candlesticks. This is a stock trading system with over three hundred years of use and it is far and away the best for tracking stocks and commodities as well as understanding the trends and patterns that occur in the market.
Conclusion
For the average investor, nothing beats index funds. Index funds are simple, secure ways to invest and prosper in the stock market. Index funds allow the investor to relax, knowing that he or she is using the most consistently performing method in the stock market for investing. For the more daring investors, index funds might be a part of an investment philosophy that gives the investor complete control over his or her financial future. Whether investing on your own or taking advantage of index funds, you need to know your own limitations.
