How To Invest in Index Funds: A Beginner’s Guide | NextAdvisor with TIME

We want to help you make more inform decisions. Some links on this page — distinctly marked — may take you to a partner web site and may result in us earning a referral mission. For more information, see How We Make Money. Why bother buying individual stocks when you can buy the entire commercialize ? That ’ s what you get when you buy an index fund—a authentic and cost-efficient manner to build long-run wealth that ’ s suitable for about every investor, according to a range of personal finance experts. An index fund is a group of stocks that track a particular market or sector. For model, an index fund that tracks the S & P 500 would allow you to invest in each of the 500 largest publicly traded companies in the U.S., all at once for a low tip.

individual stocks may rise and fall over fourth dimension, and some might vanish wholly. But the stallion banal commercialize has a test read of growing steadily and systematically over long periods of clock time, and exponent funds are an easy direction to own a musical composition of that emergence. “ I don ’ t have time to be looking at fiscal statements all day long. I have to walk my chase. I have to take vacations. That ’ randomness why I like exponent funds. It ’ s an all-in-one box, ” says Delyanne Barros, an endow technical and founder of Slay the Stock Market investing course who says she keeps 85 % of her wealth in index funds. By investing in index funds, your dollar is spread out between many assets, which lower your risk of losing money. “ Index funds tend to be low cost, well-diversified and available to most investors, ” says Mark Leong, a wealth management adviser, at Northwestern Mutual. here ’ s what you need to know about an index fund, how to pick an index fund, and how to get begin invest .

5 Steps to Investing in Index Funds

You can get started pretty quickly with index funds. But as with any investment, it ’ sulfur however authoritative to do your own research before making a commitment. Let ’ s walk of life through the steps to take when investing in index funds .

1. Set your goal

The room to make money in index funds is with patience and clock. “ The diagnose of the game here is long-run, ” says Barros. For example, the S & P 500 has delivered damaging returns in 31 % of the years in its history, according to data gathered by measure of a Plan, a personal finance web site. But there hasn ’ deoxythymidine monophosphate been a individual 20-year period in which it has lost money. With index funds, “ finally you are going to make money no matter what, ” the personal finance technical Suze Orman recently told NextAdvisor. “ You ’ re going to be merely very well ampere long as you have 5, 10, 15 years until you need this money, preferably longer. ”

Pro Tip

Don ’ triiodothyronine forget to check on your investments from time to time for finely tune.

You should besides decide how stock-heavy you want to be. The older you are, typically the more button-down your investment scheme will be. But the younger you are, you can afford to be more aggressive with stock index funds, because you are likely to have the money in the market for a longer period of time .

2. Pick an index 

There are market indexes that track about any group of investments conceivable. Some track big companies, like the S & P 500. Others track international stocks, such as MSCI Emerging Markets. Indexes can besides track other investments, like bonds or currencies. If you ’ re just starting out, picking a broad-based index store that covers the integral lineage marketplace, like the S & P 500, is a good station to start. “ Every broke offers one. Look for the one that says S & P 500 or total stock market, ” says Barros .

3. Pick a fund 

After you find the exponent you ’ ra concerned in, there are normally at least a few options for funds that track that index. Different funds that track the same index will by and large have identical exchangeable performance histories. But there could be a meaningful difference in their fees. Look for index funds that have the lowest tip, besides known as an expense proportion. Some index funds, like those from Fidelity, could even have expense ratios of zero. “ That ’ randomness music to the ears of an index fund investor, ” says Barros .

4. Buy shares 

To invest in an index investment company, you need to buy shares of that fund. You can invest in exponent funds through a taxable brokerage score or through tax-advantaged retirement accounts, like your 401 ( thousand ), or traditional or Roth IRA. “ You have to go in there and look for the index fund when you ’ re setting up your retirement accounts, ” says Barros. “ You can tell something is an index fund by the claim, if it says index, or by the depleted or non-existent expense proportion. If the expense ratio is 0.1 % or downstairs, it ’ randomness credibly an index fund. ” Some, but not all, brokerage house accounts require a minimum investment to get started .

5. Follow up and keep investing

Experts love index funds because they ’ rhenium easy to manage—you don ’ t need to do much sidereal day to day. But that doesn ’ t bastardly you should buy exponent fund shares then forget about them. Depending on your investment finish, decide how much you ’ d like to continue investing every month. “ For exemplify, if you ’ rhenium pursuing fiscal independence, you can find a compound interest calculator on-line and run your numbers. If you want to hit your fiscal independence number in 30 years, you need to invest X amount a month. You can divvy it up through your multiple accounts, but be certain to prioritize your retirement accounts first, ” says Barros .

Pros of Investing in Index Funds

  • Diversification – With index funds, you can buy one share but have investments in many different assets. This allows you to balance your risk between a range of investments. 
  • Lower fees – Index funds are generally passive, so the fees they charge are almost always  lower than funds that are actively managed. 
  • Proven success – Time and time again, index funds outperform actively managed mutual funds with higher fees. And they are a more predictable, stable investment than alternative assets like crypto. “Some people comment on my videos and say, ‘I made 3,000% return on crypto.’ But crypto crashed, and index funds are up 15%. This is what I’m talking about,” says Barros. Over its history, the S&P 500 has delivered an average annual return of 8.4%, according to Measure of a Plan.

Cons of Investing in Index Funds

  • There will be down days – Just like any investment, there will be down days. But it’s important to keep that long-term mentality in mind. Over long periods of time, total market index funds have a record of gaining value. 

Other Investment Methods

exponent funds are a childlike and cheap way to diversify your investments. But there are plenty of other options available, arsenic well. here are a few other investments to consider .

Individual Stocks

When you buy a contribution of a single neckcloth, you are buying a part of the company. When the company does well, the price of your shares increases. When the party performs ailing, the reverse occurs. Your investment in a company ’ south stock certificate is directly tied to the company ’ s fiscal performance. Be certain to diversify your stock portfolio to protect your investments .


A bond is basically an IOU. When you buy a alliance, you ’ re lending money to a borrower. That borrower might be a government or a pot, and they promise to pay the money back, plus interest. When the bond “ matures, ” the borrowing condition is over, and you ’ ll get your investment back with the accrued interest. But you can sell the bond before it matures. There are index funds that track adhesiveness markets, precisely like there are index funds that track lineage markets. Keep in mind that bonds have historically provided lower long-run returns when compared to stocks .

Active mutual funds

Some people prefer to have investing managers take an active function in managing their investments. With an active fund, you can rely on the expertness of an investing coach with the hopes that they ’ ll be able to beat the commercialize. But you ’ ll broadly pay higher fees with an active fund, and active funds tend to underperform the market over farseeing periods of time

Index Funds to Get Started With

Investing styles and tactics are highly subject on personal preferences. But to start out, you can try an index fund that tracks the S & P 500. The S & P 500 tracks 500 of the largest publicly traded companies from across sectors. Because these companies make up such a big parcel of the economy, the S & P 500 close follows the campaign of the stallion stock market. Three well-known index funds that track the S & P 500 are Schwab S & P 500 Index Fund ( SWPPX ), Vanguard 500 Index Fund – Admiral shares ( VFIAX ), Fidelity 500 Index Fund ( FXAIX ). “ There international relations and security network ’ triiodothyronine a single solution for everyone, ” says Leong. “ My advice for a newfangled investor would be to develop a holistic plan based on your long-run goals and create a portfolio that aligns with those goals and your hazard tolerances. ”


Are index funds risky?

Although index funds help to diversify your investments ( which can offset risk ), all investments can be hazardous. But investing in a total marketplace index fund over a long period of time is angstrom close to guaranteed success as you ’ re going to get. There international relations and security network ’ triiodothyronine a single 20-year period in the S & P 500 ’ mho history when it lost money .

Where can I buy index fund shares?

index funds shares can be purchased on-line at a discount rate brokerage tauten such as Vanguard, Fidelity, or Schwab. You can besides invest in exponent funds through most employer 401 ( thousand ) plans and within tax-advantaged accounts such as traditional and Roth IRAs .

Do index funds charge fees?

many index funds charge fees in the form of a percentage of the full prize of your reciprocal fund shares. This is called the fund ’ s expense proportion. however, there are some index funds that do not charge fees at all.

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