Index Funds: The Ultimate Set-It-and-Forget-It Investment
If you’ve been working hard to pay down your debt, improve your credit score and build up your savings account, you might be ready to think about the next step in your financial journey. If you have a job with even a little bit of extra income that allows you to invest, you should take advantage. When your money grows on its own, you reap all the benefits of compounding interest to build your savings exponentially faster than you would just by keeping it in a low- or no-interest checking account, so it makes sense to up your game when it comes to investing.
Nervous about investing in the stock market? That’s understandable, especially considering how volatile things have been so far this year. All those ups and downs can be terrifying if you’re following along, just watching your account balance go on a rollercoaster ride. After all, no one wants to lose their principal and walk away with less money than they started with — a real risk with stock investments that, unlike your bank’s savings account — aren’t FDIC-insured.
Enter the index fund. No, they don’t come with any kind of guarantee of success, but they do promise that you won’t do any worse than everyone else when it comes to your investment returns. For a low-key investment that doesn’t require you to track its performance, Index funds are the way to go. Here’s everything you need to know to decide if they’re right for you.
What Are Index Funds, Anyway?
An index fund is like a mutual fund, which is basically a big pile of stocks from individual companies that you buy into. When you buy a share of a mutual fund or index fun, you get a tiny piece of lots of different stocks, so your investment is automatically diversified and not toed to the fortunes of a single company.
Most mutual funds are made of up certain types of stocks, and they have a financial manager in charge. It’s this person’s job to research the market and make their best guesses about what’s going to happen next, buying and selling as needed to try to make the most money possible.
An index fund, on the other hand, is designed to perform the same way as an existing index — typically the S&P 500. All that means is that an index fund will have a broad balance of stocks and be passively managed to keep going up and down in the same pattern as the stock market at large. When the market does well, you benefit. It’s basically like buying one of every available stock so you have the whole market in your pocket.
The Index Fund Philosophy
The main thing that sets index funds apart from other mutual funds is that no one is trying to “beat the market.” With a mutual fund, the manager’s reputation — not to mention their annual bonuses — are on the line, so they work hard to make the right trades at the right time to sell when the market is up and buy when it’s down to keep shares of the mutual fund worth a lot.