Want Thousands in Monthly Retirement Income? Focus on Dividends
It pays to be consistent.
An index fund is an investment that tracks a market index, typically made up of stocks or bonds. Index funds typically invest in all the components that are included in the index they track, and they have fund managers whose job it is to make sure that the index fund performs the same as the index does.
There are hundreds of different indexes you can track using index funds. The most popular index is the S&P 500 Index, which includes 500 of the top companies in the U.S. stock market. Here's a short list of some additional top indexes, broken down by what part of the market they cover:
In addition to these broad indexes, you can find sector indexes that are tied to specific industries, country indexes that target stocks in single nations, style indexes that emphasize fast-growing companies or value-priced stocks, and other indexes that limit their investments based on their own filtering systems.
Once you've chosen an index, you can generally find at least one index fund that tracks it. For popular indexes like the S&P 500, you might have a dozen or more choices all tracking the same index.
If you have more than one index fund option for your chosen index, you'll want to ask some basic questions. First, which index fund most closely tracks the performance of the index? Second, which index fund has the lowest costs? Third, are there any limitations or restrictions on an index fund that prevent you from investing in it? And finally, does the fund provider have other index funds that you're also interested in using? The answers to those questions should make it easier to pick the right index fund for you.
You can open a brokerage account that allows you to buy and sell shares of the index fund you're interested in. Alternatively, you can typically open an account directly with the mutual fund company that offers the fund.
Again, in deciding which way is best for you to buy shares of your index fund, it pays to look at costs and features. Some brokers charge extra for their customers to buy index fund shares, making it cheaper to go directly through the index fund company to open a fund account. Yet many investors prefer to have all their investments held in a single brokerage account. If you anticipate investing in several different index funds offered by different fund managers, then the brokerage option can be your best way to combine all your investments under a single account.
Investing in index funds is one of the easiest and most effective ways for investors to build wealth. By simply matching the impressive performance of the financial markets over time, index funds can turn your investment into a huge nest egg in the long run -- and best of all, you don't have to become a stock market expert to do it.
Investors find index funds especially useful for many reasons:
As simple and easy as index funds are, they're not for everyone. Some of the downsides of investing in index funds include the following:
To address some of these shortcomings, you can always keep a mix of index funds and other investments to give you greater flexibility. If you plan on solely using index funds, however, you'll have to get comfortable with their limitations. For more on your other investment options: How to Invest Your Money
If you're looking for some index fund ideas to help you invest better, the following four are a good place to start.
Source: Vanguard Group
Vanguard funds are widely regarded as an easy entry point for new index fund investors, but you can find similar funds from other providers, as well. By incorporating different broad categories of stocks along with a fund concentrating on bonds, these four funds let you invest using asset allocation strategies to help you manage risk while getting as good a return as possible.
Index funds offer investors of all skill levels a simple, successful way to invest. If you're interested in growing your money but aren't excited about doing a lot of research, then index funds can be a great solution to achieve your financial goals.
Index funds are a special type of financial vehicle that pools money from investors and invests it in securities such as stocks or bonds. An index fund aims to track the returns of a designated stock market index. A market index is a hypothetical portfolio of securities that represents a segment of the market. For example, the S&P 500 index represents 500 of the largest U.S. companies.
The average annual return for the S&P 500 is close to 10% over the long term. The performance of the S&P 500 index is better in some years than it is in others, though.
Low-cost index funds are among the most advantageous investment vehicles for those focused on the long term. It's important to know a fund's expense ratio, which denotes how much money in management fees you'll pay, before investing your hard-earned dollars. Here are some top low cost index funds and their expense ratios:
It pays to be consistent.
Control what you can to see your money double over time.
It's cheap and gives you instant diversification.
Taking the guesswork out of investing.
Use dollar-cost averaging and aim for diversification.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.