What is Index Fund Investing?
Are you looking for a simple way to invest money in many stocks for a small fee? Index fund investing or "indexing" might be for you!
A stock index is a portfolio of stocks grouped together based on common themes like market capitalization or dividend income. These indexes follow complex methodologies to ensure only the best and most appropriate stocks are included in the portfolio. Asset managers that subscribe to these index methodologies receive cash from retail investors/retirement plan participants and invest that cash in the market based on which index fund the investor prefers. The S&P 500 index is a commonly known index in the USA and comprises the 500 largest US-domiciled companies across sectors like technology, banking, and retail.
Now that you know what an index fund is, here are three tips to follow when investing in one:
1. Check the fees. Most asset managers subscribe to the same index fund methodologies, so the biggest difference from an investor's perspective will be the fees, also known as the "expense ratio." Compare the fees assessed across different asset managers to ensure you are getting the best deal.
2. Have enough money to meet the account minimum. Index fund investing is a common buy-and-hold strategy in investing. That being said, index fund managers discourage turn-over or trading in and out of an index fund. There are account minimums to get into some index funds, so check out the requirements to ensure you are prepared.
3. Choose your asset allocation. Are you looking to invest in USA-based companies or emerging markets? Do you want to invest in technology stocks or energy stocks? Are you interested in mid-cap companies or small-cap companies? The options are endless! After considering tips 1 and 2, decide which types of index funds you would like to allocate your money towards. Investing in one index fund will provide diversification, but there's always room for a little more!
You are all set! After opening a brokerage account with your preferred financial institution and following the tips above, you'll be investing like a pro. And one of the best perks is that indexing is generally "passive." The index fund manager oversees the portfolio and rebalances it on a regular basis. So set it, forget it, and watch your wealth grow*.
*All investing is subject to risk, including loss of original investment.