What’s the Rationale for Buying Index Funds?

In this edition of The Motley Fool’s “Ask a Fool” series, Motley Fool One analyst Jason Moser and Motley Fool Stock Advisor analyst Brendan Mathews take a question from a reader who asks: “I’m in the process of starting to buy my first stocks, and I have read the 13 Steps to Investing Foolishly. It suggests buying a share of a good index fund for every dollar invested in stocks. I don’t understand the rationale. Could you provide an explanation for doing this?”

This advice is for new investors, and Brendan points out that including some low-cost index mutual funds in your adds instant diversification. If you’re starting out with only handful of stocks, you could be subject to a large losses for stock-specific reasons. That could discourage you from investing. If you’ve bolstered your initial portfolio with index funds, this is less likely to happen. And while index funds won’t beat the market, they allow investors to generate average returns at a very low cost. That’s why mixing in good, low-cost index funds is a smart move for new investors.

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