One of the biggest investing trends of the last decade was the rise of 'passive investing' through index funds. Due to the perpetual inability for most managed funds and other 'actively' managed investments to consistently outperform their index benchmark (despite charging substantial fees), investors have flooded into low-fee index funds in record numbers.
After all, as many index advocates will ask, why try and beat the market when you can just buy the market?
Considering the alternative of picking a fund and fund manager, it's hard to argue with this sentiment.
If you do wish to invest in ASX shares (or global shares for that matter) without going through an actively managed fund, indeed the only 2 choices are to buy index funds or try and choose individual shares yourself.
If you're not confident with the latter, that's fair enough. We Fools try to encourage everyone to invest with confidence, no matter their background. But the reality is that investing is an emotional journey as well as a financial one, and many investors are not cut out to endure the often-wild swings of the share market.
If that sounds like it might ring true for your own personal circumstances, index funds might be your best friend.
How index funds work
These funds work by buying a broad basket of shares, which more or less represents the whole share market. A typical S&P/ASX 200 (INDEXASX: XJO) index exchange-traded fund (ETF) like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) will have everything from Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW) to Harvey Norman Holdings Ltd (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH).
If the Australian economy prospers, you can expect an ASX index fund to do the same. An ASX index fund is, in its essence, a bet on Australia – and throughout most of Australia's recent history, that's been a good bet to have made.
Foolish takeaway
Now an index fund will not be immune from wild swings in itself. Almost no ASX share is immune from fluctuations in value from time to time and thus the index is no different. But if you just ignore what's happening in the markets and consistently invest (even if it's small amounts) over a long period of time, you have a very high chance of coming out on top – and won't be charged an arm and a leg for doing so.
