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A few weeks ago, I reviewed the book The Complete Guide to Investing in Index Funds by Craig Baird. It is an interesting and useful book. More recently, Craig was kind enough to answer a few questions I put to him via email. Here are his answers:

1. What are some of your favorite index funds?

I wouldn’t say I have a favorite one, but I am a big fan of investment funds that match my own morals. I like the FTSE4Good U.S. Select Index because they list the companies that match environmental and human right criteria. This way you know that the index fund you are investing in, and by extension the companies, are helping to make the world a better place. As well, with the push for going green growing around the world, a lot of these companies are becoming world leaders with consumers and have nowhere to go but up. The Domini 400 Social Index is another that I like as they do not list any companies associated with alcohol, tobacco, nuclear power, the military, firearms and gambling.

2. Do you prefer index funds over ETFs?

Well both ETFs and Index Funds have similar advantages including low-risk and tax efficiency, and can be good investments but I am a bigger fan of index funds. It is argued that ETFs represent only short-term speculation, and the expense of trading decreases the return to investors when compared with index funds. Those who work with index funds feel that there is not enough diversification in ETFs when compared with index funds. I personally feel that index funds are a safer investment, especially in tough economic times.

3. Do you recommend an all-index fund portfolio?

This really has to do with the individual investor. While an all-index fund portfolio can be good because there is low-risk, but low-rewards, it may not work for everyone. If someone is in their 50s or 60s and wants to get high returns for their portfolio to fund their retirement, then they may not get the rewards they want out of index funds. However, if they already have a lot of money in their portfolio and just want to slowly add to it, then an all-index fund portfolio can work for them. Young investors may not want an all-index fund portfolio because while they have a long time to build their portfolio finances, they may want to take some higher risks because they have a greater amount of time to rebuild in the case of a bad investment. I think it is good to diversify. If you are a high-risk investor, then perhaps make only part of your portfolio focused on index funds, with the rest invested in stocks, currencies, mutual funds, etc… The really adventurous and knowledgeable investor may want some index funds, especially if they are investing in junk bonds. If you want to be conservative and just bring in a little amount of money with little risk, then perhaps an all-index fund, or nearly all index fund, portfolio may be a good fit. That all being said, you do not want to put all your eggs in one basket, even if it is index funds. I would always ensure there is diversification in any portfolio, with the amount of index fund makeup in it varying from 30 percent for high risk investors, to 80 percent for conservative investors.

4. How would you invest in a recovery?

This is a good question as a lot of people are wondering about it. Personally, and this may work for me and not others, I would invest in index funds heavily in tough times because you are not trying to beat the market with index funds, but mirror it. It is pretty much impossible (or nearly) to beat the market because all the information relating to a stock immediately affects the price of the stock, so there is no legal way of getting a jump on things, so much of it is chance. If one was to invest in stocks, then investing in the stocks of companies that traditionally do well but have lower stock prices because of the recession would be a good bet because they will go back up eventually. I would also invest in renewable energy companies. A large portion of the stimulus package created by the government is being used to create green jobs and to push renewable energy. A lot of these companies are going to see very fast growth in the coming years I think.

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Things are still volatile on the stock market. Witness today’s rout, and the fact that Dow 10,000 was short-lived this week. While, overall, the trend is for a higher stock market, ordinary people get jittery with this kind of volatility. And it isn’t helping that one of the reasons the stock market is falling today is that Bank of America has reported billions in losses. However, if you can handle taking the plunge, now is a decent time to buy.

Whether you are looking at clean tech or biotech or blue chips, looking for individual companies to buy right now can be tricky. But if you do your homework, and have an eye for bargains, you might be in good shape. Here is what MSNBC writes about buying in this market:

The trick, of course, is spotting companies like these early and having the courage to take the plunge when you do. It helps to get your information from someone you can trust — someone who has the experience and resources and does the legwork. In other words, not from some yahoo on the phone.

Courage is something that you need anytime you are putting your money out there. There is always a risk of loss when you invest, and you need to know that you have the risk tolerance for whatever it is you are doing. You also need to avoid putting in money you can’t afford to lose.

Limiting risk with funds

You can limit risks (but not eliminate them altogether) with the use of funds. Index funds and ETFs can provide a way for you to get in the market when things are still reasonably cheap, but limit your risk by ensuring that everything isn’t riding on a single investment. It is still necessary to have courage, though. You have to be able to ride out the down cycles, and not get too upset about times when the stock market heads lower.

In the end, investing is about having the guts to try and make a higher return on your money, even if it means risking losing your capital.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

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As you might know, I am something of boring investor. Nothing too fancy for me. In fact, I am a huge fan of the index fund. So I was very interested to have the opportunity to review the book The Complete Guide to Investing in Index Funds by Craig Baird.

Index Funds truly is a complete guide. It starts out providing you with background into what an index fund is, and how they came to be. It also provides helpful information on what an index is, versus what the market is. If you are looking for a solid foundation and some good education, this book will start you out right. It even covers the different stock indexes in the U.S., as well as other stock indexes, and an overview of bond market indexes, indexes that track commodities and currencies, and mortgage-backed securities.

Baird also makes it a point to describe the advantages of mutual funds and index funds, and what you can gain by investing in them. He also compares index fund investing with stock picking, and compares index funds with more traditional mutual funds. After providing you with a solid understanding of index funds, how they work, and the available options, Index Funds moves on to the more practical aspects.

The next portions of the book are devoted to helping you set goals and plan your investment portfolio. Baird offers some insight into putting a portfolio of index funds together, as well helpful hints on asset allocation and managing your index fund investment portfolio. To finish up, the book includes profiles of a number of low-cost index fund providers, as well as case studies and a helpful bibliography.

Overall, this is a very good book for those who are interested in investing in index funds. It is a great resource for taking you through the stages of education, helping you understand how you can earn decent returns with a relatively low risk investment (nothing is risk-free), and what you can do take charge of your own investing future.