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Learn about index funds and why they are important.
What are Index Funds?
An Index Fund is a type of fund that tracks the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500). An index fund provides broad market exposure, low operating expenses and low portfolio turnover. Investing in an index fund is a form of passive investing. The primary advantage of such a strategy is the lower management expense on an index fund. Also, a majority of actively managed funds fail to beat broad indexes, such as the S&P 500. Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.
Why Invest in Index Funds?
Since Index Funds track the S&P 500 that means it is much riskier than putting your money in a Money Market Account, but it can be significantly more profitable. For example, the 5-year return on the Vanguard Total Index (VTI), which tracks the S&P 500, is 44.91%. To put that into perspective a $5,000 investment in a typical Money Market Account would be $5,386 after 5 years, while a $5,000 invest in VTI would be $32,015 after 5 years. There is no guarantee that you will profit on your investment. If the stock market crashes there is no insurance on your investment.
When Should I Invest in Index Funds?
There is a simple answer to this question. As soon as possible. The stock market only goes up, so if you are young and have $200 extra dollars to invest get started. There may be periodic drops in the stock market, but don’t listen to what anyone says there won’t be anything permanent it’s only temporary. Just ask yourself this simple question, are you a trader or are you an investor? If you are a trader then you can worry about stock market fluctuations because you will only invest for days, but if you are an investor then you will in the stock market for years and fluctuations don’t concern you.
Quiz
https://www.youtube.com/watch?v=XievFMEBZKo
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