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In many ways, real estate is the prototypical long-term investment. It takes a good bit of money to get started, the commissions are quite high, and the returns often come from. Real estate can be an amazing way to get rich, but it will take some time and effort. For instance, flipping houses means that you need to buy a certain property within your range first.

You’re a new investor attempting to diversify your portfolio, maximize your returns, and minimize risk.

As you explore your options, you are going to want to consider index funds and real estate — two investments that can diversify your holdings and increase your chances of earning positive returns.

So, which is the better option: Index funds or real estate? Here’s a primer to get you up to speed.

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Index Funds: An Overview

Once you decide to enter the stock market, you’ll find there are two basic ways to invest. (There are other approaches and strategies that more seasoned investors can use, but we’ll save those for another post.) You can either purchase individual stocks, or you can invest in funds that give you access to a broad range of securities and equities.

That said, you don’t have to be exclusive — and many investors diversify their holdings by investing in both individual stocks and funds.

What Are Index Funds?

An index fund is a portfolio of bonds and stocks that tracks the performance of a market index — if the market overall does well, you do well, so you don’t have to pick and choose the winners. Examples of indexes include the Standard & Poor 500 (S&P 500), the Dow Jones Industrial Average (the Dow), and Nasdaq.

Index funds are typically passively invested, meaning they are automatically assembled and managed without human intervention. This makes index funds different from mutual funds, which are actively run by managers who attempt to beat market performance through various methods.

And just to be clear, having a fund actively managed is no guarantee of success — in fact, the majority of those underperform when fees are taken into consideration.

How to Invest in Index Funds

Index funds can be purchased through most brokerage accounts or from an index-fund provider like Vanguard or BlackRock. Unlike stocks, which are continuously traded throughout the day, index funds are bought and sold based on the price set at the end of the trading day.

There are two ways to invest in index funds.

Brokerage Account

Some investors choose to invest in index funds through brokerage accounts, which are set up for short-term and medium-term growth.

When you invest through a brokerage account, you have the freedom to liquidate at any time without facing a penalty from the Internal Revenue Service (IRS). However, you may have to pay fees to the broker where you purchased the index fund.

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Retirement Account

Index funds are excellent core portfolio holdings for long-term 401k investments, individual retirement accounts (IRAs), and Roth IRAs. Typically, index funds are more resilient to market swings, therefore they can provide more stability than individual stocks.

Retirement accounts can also provide tax protection for index funds, enabling investors to avoid paying taxes for decades. You’ll still have to pay taxes when retirement age rolls around, but this strategy can help maximize compound interest and grow your investments impressively over the long run.

Plus, if you’re retired, you likely will have less income and therefore will pay a lower tax rate.

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The Pros of Index Funds

Passive Management

Passively managed funds tend to outperform actively managed funds over time. Active funds require direct human intervention, which means higher fees and doesn’t necessarily mean better returns.

Consistent Growth

Index funds can also provide steady, long-term growth for investors. Since they are diversified, index funds can protect investors from steep losses on specific stocks. If one or two accounts in a portfolio tank, they are going to be naturally worked out of an index — meaning it’s only going to lead to a temporary loss in the fund.

Because of their consistency and ability to produce large gains slowly over time, index funds are an excellent option for long-term “set it and forget it” portfolios.

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Low Fees

Index funds have much lower fees than non-index funds. And, since index funds don’t require portfolio managers, they tend to have lower expense ratios. When it comes to expense ratios, the lower the better.

An expense ratio refers to the amount of the fund that goes toward growing your investment, as opposed to paying for management and administration of the funds.

The Cons of Index Funds

Minimum investments

One of the downsides to investing in index funds is they often have a higher barrier of entry than individual stocks. For example, the Vanguard Dividend Growth Fund (VDIGX) comes with a minimum investment of $3,000, potentially putting this fund out of reach for investors who are operating on a budget.

That said, brokers like Vanguard typically offer index funds that don’t require minimum investments, too. For example, the Vanguard 500 ETF (VOO) has an expense ratio of just 0.03% and no minimum investment requirement.

Shop around to find the best index funds that align with your budgetary restrictions. Vanguard and Blackrock are optimal places to start your search.

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Potentially High Fees

Watch out for index funds that have exorbitant expense ratios of 1.5% or higher. There’s really no reason for an index fund with high fees. And every dollar that goes into someone else’s pocket is a dollar that’s not building long-term wealth for you.

In addition, index funds can come with additional fees like annual charges and exit fees which occur when you trade or liquidate your funds. Always read a fund’s prospectus before purchasing it so that you have a clear understanding of what you’re getting involved with before you agree to anything.

Limited Flexibility

Index funds have less flexibility than managed funds because they follow strategies to stay aligned with various indexes.

This can become an issue for a declining index. When this happens, fund managers have little choice but to ride out the dip and wait for the fund to turn around. A rebound almost always occurs, but it can take time to occur.

When investing in index funds, investors need to be patient. Otherwise, it can be frustrating watching a fund underperform for an extended period of time. The best strategy with index funds is to set it and forget it. Focus on diversifying your portfolio and looking for ways to offset downturns.

Slow Growth

Don’t expect to get rich overnight with index funds. Even if you invest in a high growth index fund, your money will be spread out over an array of companies. So if one of the companies in the index happens to double in value in a short period, the success will be diluted since it’s only a small part of the fund.

The bottom line here is that index funds are an excellent option for slow and steady investing who are looking to grow their net worth over years and decades.

Now that you have a better understanding of how index funds work, let’s take a deep dive

Real Etate Take To Long To Get Full Money Return