3 Warnings to Heed Before Investing in Index Funds

Index funds are an average Joe’s best chance for investing success. The truth is if you do the numbers, they don’t lie.

However, as with all things, there are certain nuances that one must be aware of before making any investments in index funds.

So, with that said, here are 3 warnings that you must heed before investing:

#1: Don’t Take a Passive Approach

While picking the right stocks is the first thing to do, there are a number of things to do. Yet the most important thing to do is to constantly review and maximize the after tax return. Apart from this, he also has to rebalance, pick an asset allocation, and tax-loss harvest too.

#2: Be prepared to stick with the ‘down years’

Given how the media always paints a picture of doom and gloom, it can be difficult to stick with your investment during a bear market. During the last financial crisis, bringing down stock allocations was advised.

However, this wasn’t good advice considering how the equity valuations had dropped completely. So, no matter what, make sure that your investment is for the long-term, regardless of good or bad news.

#3: Don’t Spend More Than Usual During the Good Years

Even though U.S stocks usually offer 10 percent every year for the long-term, there are some years when one gets different results. While it can get good during a couple of years, there are others where one can truly make a killing.

That said, it isn’t a good idea to overspend during these years as these extra earnings will help cover for the years that can be considered as bad.