Posted on 30 June 2012.
Index investing can save you from becoming a statistic. Every once in a while, a big company will fail and its share value will either plummet or completely disappear. Afterward, you hear the news stories about the people that invested all their money in that one company.
People make huge investments like this for many reasons. Sometimes they think that they can make secure a greater return by putting all their money into a winner. Others just do it because it is easier to monitor one investment. No matter what their motives are, this investment behavior is always a bad idea.
Index investing is the best strategy for almost anyone. These investments naturally diversify your portfolio. They relieve you of the responsibility for maintaining diversity because they have already spread out the money. Each index usually concentrates on one sector of the economy. One might have money in a variety of gold mines while another purchases commodities contracts from multiple sources. If one of the companies in which the index has invested suffers a setback, it is likely that the others will balance out any losses.
You still have some responsibility to diversify when you begin index investing. You can protect yourself from risk even more by investing in several indexes from various sectors of the economy. The best indexes are those that represent investments in active sectors, such as energy, commodities and precious metals.
It is also a good idea to choose indexes from other sectors, such as alternative energy, in order to increase the variety of your portfolio. By index investing in such a large chunk of the entire market, you allow your portfolio to follow the general upward trend of the market as a whole.
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