What is an index fund?
We at Noon Invest use index funds to build our portfolios. The various index funds try to mimic the development of a specific index, for example the Oslo Stock Exchange (OSEBX). The difference between active funds and index funds is that the index fund must follow the index completely. This means that the fund does not need a manager who has to spend time analyzing different companies or working towards better returns than the index.
To understand index funds, it is important to know what an index is. To put it simply, you can imagine that an index is a composition of stocks that is meant to reflect a given category. For example, it could be an index that reflects the salmon industry in Norway. Then such an index contains, for example, all salmon shares that can be bought on the Oslo Stock Exchange. It often sounds very confusing to have to think about all these moments when all you want is to just save in index funds. Here at Noon Invest, we are very concerned that you as a customer do not have to think about which indices to choose and why. We have therefore created an investment calculator that takes 2 minutes to complete. By using the calculator, you get a suggested portfolio that is just right for you, based on the answers you give.
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In recent years, index funds have been much in the media and become very popular. Among other things, the Consumer Council expresses its support for index funds for savers. Index funds also get a lot of support in research environments as they are very cheap compared to most active managed funds. Index funds also receive support for following a blind strategy, as opposed to being dependent on how smart the managers are.
NOT ABLE TO BEAT THE MARKET
One term you have probably heard in connection with index funds is passive management. There is often a debate about what is best for active and passive management. We have previously mentioned what active management is, and then it comes as no surprise that passive management is the opposite. In the case of passive management, the fund blindly follows one or more indices.
The debate about active or passive management is often characterized by the managers on the one hand and academia on the other. Akademia has for a long time favored passive management, and several research reports have been made which indicate that index funds in the long run do as well or better than active stock picking. Typically, actively managed funds often cost around 2%, while index funds are often 0.1-0.4%. When you include the costs, index funds often come out positive compared to active management.
En veldig kjent tilhenger av passive fond (indeksfond) er Warren Buffet. Orakelet fra Omaha er kanskje en av verdens mest kjente investor. I 2007 inngikk han et veddemål med en annen kjent investor. Buffet selv valgte et fond som fulgte den kjente S&P 500 indeksen i USA, mens den andre investoren plukket sine favoritt fond. Veddemålet ble avsluttet januar 2018 med seier til Buffet. Hans fond kom ut med 7,1% årlig avkastning mens de øvre fondene til hans konkurrent havnet på 2,1% årlig.
When you start saving, it is often difficult to decide whether to choose passive or active management. The most important question to ask is whether you yourself are satisfied with the average return? If you are, index funds are a good strategy for you. The graph below shows the return history for one of our model portfolios from 2004-2018. As you can see, there are some deep valleys, especially as many remember in 2008/2009 during the financial crisis. Despite this, the trend is rising, which indicates that it is wise to invest with a long time horizon. This way you also avoid thinking a lot about timing. The simple is often the smartest.Hittil i år har markedene vokst betraktelig med tanke på hvordan 2018 endte. Per dags dato (24.04.19) er vår aksjeindeks-baserte portefølje opp 12,76%. Ikke gå glipp av oppgangen! Ta kontakt i dag på mail@noon-invest.no for en uforpliktende og kostnadsfri samtale.
-Written by Veronica Nesvik, customer manager at Noon Invest