Fear keeps a lot of people from investing. A survey by Ally Invest found that 65 percent of Americans find investing in the stock market to be scary or intimidating. Fear is stopping you from really building your net worth, whether it’s because you’re afraid of making a bad investment and losing money or because you don’t have access to good investing advice.
The good news is that there are many easy ways to invest. You don’t have to worry about picking stocks, and you don’t always have to pay a lot for an adviser. One of the easiest ways to start investing is with index funds.
An index fund is a type of mutual fund or exchange-traded fund (ETF) whose portfolio is designed to mirror or follow the components of a financial market index, like the S&P 500 Index. A mutual fund that invests in indexes should give you access to a wide range of markets, have low portfolio turnover, and have low operating costs. No matter what happens in the market, these funds stick to their benchmark index.
Safe place for retirement money
Warren Buffett, who is known as one of the best investors of all time, has said that index funds are a safe place for retirement money. He thinks that the average investor would be better off buying an index fund, which is a cheap way to buy all of the companies in the S&P 500, than buying individual stocks.
Index funds attempt to hold the same stocks as the corresponding index. As a result, they are inherently diversified and carry less risk than holding individual equities. In the past, market indices have also performed well. Even though the S&P 500 fluctuates, it has historically provided investors with an average yearly return of over 10%. (Remember that you cannot depend on future returns with certainty.)
“Indexing” is a type of passive management of funds. Instead of actively picking stocks to invest in and planning when to buy and sell them (called “stock picking” and “market timing,” respectively), a fund portfolio manager builds a portfolio whose holdings are the stocks in a certain index. The idea is that if the fund copied the profile of the index, which is the stock market as a whole or a large part of it, its performance would be the same.
Most popular indexes
There is an index and an index fund for almost every market in the financial world. The S&P 500 is followed by the most popular index funds in the United States. But many other indexes are also widely used. These include:
• Wilshire 5000 Total Market Index, which is the biggest stock market index in the US
• MSCI EAFE Index, which includes equities from Europe, Australasia, and the Far East.
• The Bloomberg U.S. Aggregate Bond Index, which tracks the whole bond market.
• Nasdaq Composite Index, which is made up of 3,000 companies that are listed on Nasdaq;
• Dow Jones Industrial Average (DJIA), which is made up of 30 large-cap companies
Portfolios of index funds only change a lot when their benchmark indices change. If the fund follows a weighted index, its managers may change the amount of each security in the fund on a regular basis to reflect how much weight each one has in the index. Weighting is a way to make sure that each position in an index or portfolio has the same effect.
