Why should you invest in a diversified portfolio of index funds? There are basically three good reasons to invest in index funds.
First, they have very low fees.
It turns out it's not very expensive to just own a little bit of everything weighted like the market.
And since fees are one of the big reasons that investors trail the market, you can get ahead of most other people by paying just low fees when you own an index fund.
The second reason is that they're actually very tax efficient.
In our tax system, you owe taxes only when you sell a security.
Actively managed funds sell securities all the time and trigger taxable distributions, while index funds mostly just hold the same stocks year in and year out.
And then third, there's the basic fact that index funds tend to outperform most active traders and active fund managers.
So you can get better returns with lower fees and lower taxes if you own a diversified portfolio of index funds.
Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.