They're good to start with. I don't have much in my Roth, nor much time to research stocks, so they're a nice brainless/autopilot way to get exposure to the market. Just watch your expense ratios in the fund you pick.
Once I build up a higher balance, I'll look at individual stocks when I'll be trading at a level where transaction costs won't eat me alive.
It depends on how much you have to invest, how long you want to leave it in the market, and your personal risk tolerance.
I frequently hear/read that the majority of mutual funds don't beat the S&P. So you can outperform most fund managers with SPY (expense is .1% IIRC). You can also concentrate on sectors or even move your money out of the country, Japan, Britain, whatever- with one trade.
The problem with IRAs is that you can't short the market. From mid '00 to '03 you were stuck in cash or watching your balance evaporate. I've just gotten some information on two ETFs- DXD- Proshares Ultra Short Dow30 and SDS- Proshares Ultra Short S&P500. These are leveraged, 1% fall in Dow yields 2% RISE in DXD, etc. Haven't checked out the expense charge. May be something to consider at some point.
actually, FSMKX @ .10
Good advice: Once you have the funds built up and the time to research (and it DOES pay to research funds).
Index funds are dandy for when you don't time to research. Make the time later. True, the vast majority of funds don't outperform the market index, but some do. It's worth the effort.
Personally (and I'm not an expert by any means) I have these in my limited choice employer provided 401k. I've been in the fund 5 years so far.
So compare the S&P 500 index to the returns on each of my funds.
Fund, Name, Avg Annual Total Returns for 1,3,5 and 10 years
S&P500 Index: 11.83%, 10.06%, 6.27%, 8.2%
DODGX: 14.51%, 14.40%, 12.15%, and 14.15%
Dodge & Cox Stock
FDGRX: 2.25%, 10.50%, 7.01%, and 9.83%
CRMMX: 14.28%, 15.82%, 13.01%, N/a
CRM Mid Cap Fund
AUSAX: 4.84%, 13.32%, 11.53%, 13.25%
FDIVX: 15.18%, 18.41%, 17.41% 13.22%
Fidelity Divs. International
Roughly %20 in each fund.
Yup. a couple lagged this year, but you don't get a winner each year for each fund. All in all, I'm pleased with the allocation. Remember, I don't have much choice.. 3-4 other funds that really performed poorly are my only alternatives. I've gotten better than the S&P overall for the 5 years I've been in this 401k.
Now I just started an Traditional IRA of my own this year and maxed out my $4000 contribution for the 2006 year. I'm also maxing out my 401k contribution to my employers maximum matching contribution (free money!!)
My Schwab IRA as these funds:
S&P500 Index: 11.83%, 10.06%, 6.27%, 8.2%
UMBIX: 11.14%, 14.17%, 11.66%,14.14%
(Excelsior Value and Restructuring)
SSAIX: 22.65%, 22.31%, 18.29%, 8.03%
(SSgA International Stock Selection)
MXXIX: 7.82%, 14.84%, 15.62%, N/a
Marsico 21st Century
FBRVX: 12.90%, 17.36%, 19.61%, 18.20%
FBR Small Cap
CAMOX: 9.06%, 11.20%, 9.57%, 12.25%
Cambiar Opportunity Fund
Again... roughly %20 in each fund.
the numbers above look promising compared to the S&P, but "Past performance isn't indicative of future returns".. but the chances are good, based on my research.
(also... the S&P isn't the proper yardstick for every comparison. There are valuable indexes for most categories of fund investment.
The midcap funds are compared with the Russell Midcap Index
The FDIVX and the SSAIX (international funds) are compared to an index like the MSCI EAFE Index "The EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is an unmanaged index and includes the reinvestment of dividends. It is designed to represent the performance of developed stock markets outside the United States and Canada"
"The fund industry's dirty little secret: Most actively managed funds never do as well as their benchmark." Arthur Levitt, former chairman of the Securities and Exchange Commission
"Only about one in four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing." Charles Schwab, founder and chairman of the board of The Charles Schwab Corporation
"Why waste your time trying to select and manage a portfolio of individual stocks when you can replicate the market average returns (and beat the majority of professional money managers) through an exceptionally underrated and underused investment fund called an index fund?" Eric Tyson, author of Investing for Dummies and Mutual Funds for Dummies
"If you buy -- and then hold -- a total stock market index fund, it is mathematically certain you will outperform the vast majority of all other investors in the long run. Graham praised index funds as the best choice for individual investors, as does Warren Buffett." Jason Zweig, senior writer and columnist at Money magazine