What is an Index Fund?
A type of mutual fund or exchange-traded fund that seeks to track the returns of a market index. There are many types of index funds that track the growth of the US stock market, one of the most popular is the S&P 500.
What is S&P 500?
The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. It is widely recognized as the best single gauge of the large-cap U.S. equities. As mentioned, the index consists of the top 500 companies in the U.S. listed on major stock exchange.
The 5 reasons to invest in Index Funds:
- Passive Investment – If you’re looking to invest over several years or decades, this is one of the few investments where you can contribute and forget about it. I invested in VTI (Vanguard Total Stockmarket) which tracks S&P 500, and I’ve seen solid gains over the last 3 years – see my article on how I got my start in Investment here.
- Historically 10% return per year – Over the last decade, we’ve seen amazing returns at 10%. Remember that you’ll still get declines during a recession, but since the 1920s, stock gains have been around 7%.
- Low Cost / Less Stress – Most ETFs and Mutual funds have low expense ratios. (0.03% -0.05%). Peace of mind that it’s being automatically managed and low costs.
- Great diversification –Since you’re betting on over 500 companies, you’re really betting on the United States. You’ll have to worry less about individual stocks dips and spikes.
- Can set up monthly investments – Remove the worry and emotions around day trading and the volatility. You can automatically send funds with your brokerage account and have it sent directly from your paycheck or checking account directly to your index fund.
Finally, not just from me, but words of wisdom from one of the most influential investors of our time, Warren Buffett says, “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”