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When beginning to invest or if you are a seasoned investor, one market index that gets a lot of recognition is the Standard and Poor’s 500 (S&P 500). This market index is a weighted profile of the 500 best performing companies in the United States with companies such as Apple, Microsoft, Home depot, Netflix and multiple more. There are three prominent benefits to investing in an index fund like the S&P 500 as opposed to a single stock by being able to diversify away unsystematic risk, protect themselves from companies going bankrupt, and guarantee a constant long run return that beats inflation with little effort.

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            Firstly, by investing in multiple industries with a variety of companies allows investors to diversify away most of the unsystematic risk associated with trading stocks. What is unsystematic risk you might be wondering? In general, it is attributed to risk that is company specific rather than market specific. For example, if Apple releases a horrible product that accounts for a generous portion of their sales and thus revenue will fall. Moreover, if Apple does perform poorly it would not necessarily be the case other companies such as Microsoft will also do poorly indicating the company specific unsystematic risk. Exploring systematic risk in this example would present a thought experiment where a market housing bubble pops leading to a financial crisis therefore increasing the employment ratio. This will inherently cause either a recession or depression in the future which will affect Apple and Microsoft equally demonstrating the systematic risk that is present amongst both companies.

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            Secondly, investors are able to put their eggs in more baskets just in case one basket drops, figuratively speaking of course. As a result, rather than betting all of the investors’ money on one company that can potentially go bankrupt due to unforeseen consequences, financial theory places emphasis on diversification. Diversification can be achieved by investors creating their own weighted profiles to match stocks on the S&P 500, but generally require greater monetary and time investment as opposed to simply purchasing and index fund. It becomes evident that investors who are risk adverse like many individuals who have a mortgage, car payment and family, typically are seeking investment security. So, if you are a risk-averse investor with a busy schedule index funds such as the S&P 500 might be your best bet to mitigate risks.

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            Thirdly, another pro to investing in an index fund is it provides a constant LONGTERM return, with extra emphasis on the long-term because it is not an overnight process. Index funds are diversified in manner where after certain years their returns are as high as 30% and other years with returns as low as 5% but generally average around 8-10%. Consequently, individuals who want to short-sell an index for a quick profit might not be as profitable in the short-run because of the variability of the market returns on a per annum basis. Adversely, if stable long-term investors who are risk adverse the index provides a clear-cut ticket to retiring with a comfortable sum of money.

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            In conclusion, throughout this article many avenues of success have been explored to successfully invest your money in index funds but, the question ultimately becomes what kind of investor are you? Are you someone who prefers security with very little time to dedicate to investing? index funds are your best avenue for passive income. As opposed to a person who wants to learn more about investing and potentially earn a higher return but at the cost of higher risks thus, self-devised profiles would be more appealing. No matter what your risk preference or time preference is, investing is highly educational and emotionally undertaking and the more research you can conduct the better off you will be.