[Kaizyn]

Consider the alternatives to the index fund: 1. Pick individual stocks and directly buy those. (A lot less diversification and a lot more hands-on management required.) 2. Hire a stock broker to invest for you. This is like #1 except now you are at the mercy of someone else whose interests you cannot be guaranteed to align with you. 3. Managed investment fund. Funds are diversified based on the discretion of the funds manager. Big fees are required for the privilege of having one pick stocks to buy and sell for the portfolio. 4. Real estate. Good investment but exceedingly high initial capital requirements. 5. Commodities - gold, silver, oil, pork bellies, etc. Less diversity of investment and specialist knowledge of the commodity are required.

Index funds are low cost to run, have a low capital requirement, require little to no active management, are highly-diversified, and get a fairly good rate of return. As a default option of 'do nothing and some money comes in', that's hard to compete with.

[scorpioxy]

Oh I agree. They're a good deal considering the alternatives but they also carry a lot of risk. Less risk than individual stocks of even specialized baskets but a lot of people throw the term around as if its magic. Several source I've read also assume that you'll constantly be putting money into the market and never withdrawing it to actually buy that house you start this whole thing for. Withdrawing the money means your rate of return depends on which cycle the market is in when you do it and to get the best rate, you need to withdraw when its peaking. That's timing the market. That's misleading...

But overall, I agree with your analysis. It's a great vehicle for people who either lack the time or knowledge required for investing. If you decide that stock investment is the best way forward for you...

[spoonie]

So if your time horizon is short buy bond index funds instead. The context of recommending index funds is almost always when saving for your retirement. Don't invest 100% in equities unless you're very young and can stomach the volatility. Your asset allocation should tilt more towards less volatile assets like bonds and cash as to get older. You slowly enter the stock market as you save up, and slowly exit it into other assets as you age.