By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals<\/em><\/p>Warren Buffett<\/em><\/cite><\/blockquote>\n\n\n\n
Index fund!!! This topic is something that\u2019s very near and dear to me! \ud83d\ude0a Why? Cause index funds have made me lots of money since I started investing in them in 2008. This is my time to talk passionately about something that\u2019s helped me build wealth over the years and I\u2019m confident that it\u2019ll do the same for you as well. <\/p>\n\n\n\n
What is an index fund?<\/strong><\/h2>\n\n\n\n
Index Fund = Index + Fund so let\u2019s understand each of these two pieces.<\/p>\n\n\n\n
Index:<\/strong><\/h4>\n\n\n\n
A stock market index is a hypothetical collection of stocks that have been clubbed together based on a certain criterion.<\/p>\n\n\n\n
Investors can use an index as a reference or a benchmark to compare against the performance of their own portfolio of securities.<\/p>\n\n\n\n
Some common indexes in the US are:<\/p>\n\n\n\n
S&P 500<\/a><\/strong>: Tracks the performance of 500 large companies listed on the US stock exchange.<\/p>\n\n\n\n
NASDAQ<\/a><\/strong>: This index consists of only those stocks that are traded on the NASDAQ stock exchange \u2013 most of which are technology companies.<\/p>\n\n\n\n
Fund:<\/strong><\/h4>\n\n\n\n
A fund is collection of securities (stocks, bonds or other assets) created by investment companies for investors to purchase as shares.<\/p>\n\n\n\n
Mutual funds, Exchange Traded Funds (ETFs) and hedge funds are common mechanisms via which investment companies pool in money from investors to invest into different securities.<\/p>\n\n\n\n
Index fund: <\/strong><\/h4>\n\n\n\n
As you must have guessed by now, an index fund is a fund (ETF or Mutual Fund) which mimics or tracks the performance of a certain market index like the S&P 500 index, the US total stock market index etc.<\/p>\n\n\n\n
If the S&P 500 index goes up by 1% on a certain day, then the index fund that tracks it goes up by approximately the same percentage.<\/p>\n\n\n\n
Why invest in index funds?<\/strong><\/h2>\n\n\n\n
Over a long time periods \u2013 5, 10, 15 yrs, more than 80% of fund managers underperform the market (S&P 500 index). These are the guys who manage hedge funds and actively managed mutual funds with higher expense ratios (fees) that cut into your yearly gains or add to your loss. Let\u2019s put it this way – its tough beating the market!<\/p>\n\n\n\n
Why would you bank with an actively managed fund that underperforms the market over long periods of time as well as charges you more money for the underperformance? Doesn\u2019t make sense at all!<\/p>\n\n\n\n
This is where index funds shine! They mimic the performance of a market index which is difficult to beat by you, me, or even by the high paid finance professionals in suits. Also, firms managing the index fund charge you an extremely small fee since index funds are managed by computer software and don\u2019t need dedicated fund managers.<\/p>\n\n\n\n
The Vanguard Total Stock Market ETF (VTI)<\/a> is very popular index ETF which has returned close to 14% annually over a 10 yr period. Its expense ratio is just 0.03% which means that you will pay only $3 in fees for every $10,000 invested in VTI. Awesome returns and extremely low fees. A win-win for index fund investors!<\/p>\n\n\n\n
How to invest?<\/strong><\/h2>\n\n\n\n
You can purchase index fund shares directly from the investment firm managing the fund or via your favorite stockbroker. Several years ago, I bought funds directly from the firm website cause brokers like Scottrade would charge trading fees of $7 per trade. That\u2019s expensive for someone who buys shares once or twice a month in multiple funds.<\/p>\n\n\n\n
Currently all major brokers \u2013 Fidelity, Vanguard, Schwab etc have no trading fees at all and so it\u2019s better to transact with one broker and maintain all your funds in one place.<\/p>\n\n\n\n
The investing strategy<\/strong><\/h2>\n\n\n\n
With broad market index funds, you should keep buying shares periodically (once or twice a month) so that you can benefit from \u2018Dollar Cost Averaging (DCA)\u2019<\/a>. When the markets go down, your money will buy you more shares and lower your cost per share. That way when the markets recover, you will make more gains.<\/p>\n\n\n\n
Stay indexed and stay invested my friends!<\/p>\n","protected":false},"excerpt":{"rendered":"