For extra-cautious investors looking for a safe place to invest in the long haul, index funds might be the right answer. Billionaire tycoon Warren Buffet describes index funds as a reasonable investment, particularly when thinking about retirement plans. He says that it makes much more sense to buy the entirety of a market index (like the S&P 500), instead of cherry-picking individual companies.
Unlike actively managed funds, index funds have little to no expenses, and they fall under the passive income strategy. There is a theory stating that the market will outperform every single transaction in the long run. Think of it as a casino: “the house always wins.”
There is one considerable risk, though. No market will ever be safe from worldwide crashes. When the next global crisis hits the market, index funds will take a hard hit, and you won’t be able to take advantage of the naturally-occurring ebb and flow in market shares.
Exchange-traded funds also consist of several types of securities, which can include stocks, bonds, commodities, and others (both national and international). However, unlike mutual funds that trade only once per day after market closure, you can buy and sell ETFs countless times throughout the day.
The extra convenience also presents a greater risk, given that ETFs share prices are continuously swaying. On the other hand, ETFs remain cheaper than buying individual stocks, with lower expenses and fewer commissions. When deciding on an ETF vs. Mutual Fund or an ETF vs. Index Fund, bear in mind your risk profile, and only invest in the option that lets you sleep easily at night.