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Investment strategies that lead to more frequent trading often incur increased taxable distributions. Index funds, with their lower turnover rates, usually offer greater tax efficiency, thus allowing investors to retain more of their returns over time. Research illustrates that the performance disparity between index and actively managed funds widens after taxes are taken into account.
5. Simplicity
Index funds offer a level of simplicity that can be quite appealing. For those invested in actively managed funds, monitoring fund performance and manager efficacy can become cumbersome. In contrast, investing in index funds allows investors to expect returns that closely align with the relevant index—an outcome that is easily understandable and monitorable.