What Is An Index Fund

Investing in an index fund is a great way to ensure a low-risk portfolio that produces really good return on investment. Right now, there seems to be somewhat of a trend of investors becoming millionaires, and beginner investors learning how to become millionaires by investing an index funds. but before we can talk about making any goals or making a destination we first have to talk about the vehicle, which in this case is an index fund.

What Is An Index Fund Exactly?

Index funds is are funds that track a specific index (An index is simply a measure of something). In this case, the index we’re tracking is something like the S&P 500 index. when talking about an index fund it could be confused for other things such as a mutual fund or an ETF. to be clear an index fund is not the same thing as a mutual fund or an ETF. there are vastly distinct differences in an index fund that separates it from the two that are previously mentioned thus making it more desirable for the investor. however at the same time there are a lot of similarities and This is why there remains to be confusion as to what exactly an index fund is.

First of all an index fund is a type of mutual fund. this can be broken down into two types of index funds, which is a index mutual fund, and an index exchange-traded fund, also known as an ETF. depending upon your situation, one type of index fund may seem more desirable than the other. this also depends upon how much control you want over your investments. for example, do you want to be able to trade your holdings what times a day like a stock? do you want to have someone else manage your portfolio it tried to beat the market with their knowledge and your money, or do you want to just park your money in something and passively watch it grow. in order to be able to answer this question and make an educated decision, you may be asking yourself…

“What is an ETF?” or

What is a “Mututal Fund”?

I’m glad you asked!

What is A Mutual Fund?

A mutual fund is an actively managed fund whereby a vast assortment of stocks art groups together in a diversified fund. This is very attractive to the investor because you are leaning on a knowledge of some type of financial advisor that has been qualified 2 manage one’s investment portfolio in order to help them make the most money as possible. in return there is a fee that comes with this afford the financial advisors hard work energy and knowledge.

Because the mutual fund is an actively managed fund, you as the purchaser or the investor pay different fees depending on the type of stock or holding that you purchase. This fee is not an astronomical fee. This fee is typically ranging between 1% to 4% or even higher. the financial advisor gets paid that said amount weather your investment does good or bad and that is why mutual funds may not be desirable for some. however for the risk taker this may be a well risked gamble. high risks bring high reward, right?

On the other hand mutual funds are typically a great investment because of the fact that there are so many different well performing stocks within a given fund. if you decide to purchase a fund that mirrors the S&P 500, and 5% of the companies in that fund have a bad year but the rest do pretty well, the performance of that particular fund will still increase immensely thus bringing you a really good return on investment and almost guaranteed investment. This is opposed to buying separate stocks such as apple, Best Buy, Walmart Sony or any other type of company that you can think of that is publicly traded. If one of those stocks go down and have a bad year and most of your investments is in that one company, you may have a loss in your investments.

With that said if you choose to go this direction and you decide to pay something like a 1% fee, you need to know that even though your portfolio is doing well, you can also have the huge amount of potential earnings that were lost due to the fees. An example below that will show you what a 1% fee looks like when you’ve invested $100,000 over the course of 10 years. as you can see you would have lost X amount of dollars:

The other side of this is if you have a great financial advisor who really knows what he’s talking about or she, if they have great insight and sources, you can possibly make a great return on investment that you would not have received if you chose to passively invest by yourself.

What Is An ETF

An ETF is practically the same thing as an index fund, but in stock form. You can only trade an ETF one time per day, if you chose to do so. An ETF can be traded, sold, purchased, multiple times in the day, just like a regular stock. Remember, that I had said some people want more control over their investment? This is exactly where it comes in to play.

Probably the biggest advantage of an ETF in my opinion is that the buy-in for a share of stock is tiny in comparison to an index fund. One of the most popular funds VSTAX has a buy-in amount of $3500! Index funds are great, but it is just not affordable for the average person. An ETF, however can cost $100. For an average person, this can be done.

This is an excellent way to begin your investment portfolio safely, with low-risk. If you choose to invest with ETFs, you are setting yourself up for the future in a great. If you can only purchase a stock per month, then purchase a stock per month. Growth will happen either way.

Types Of Indexes To Know About

Earlier, I gave you the definition of what an index is, and why this pertains to an index fund. I also mentioned the S&P 500 as one of the more popular indexes. You do not have to be an expert and know all of the other stock indexes, but if you plan on taking your finances and investing seriously, I recommend that you become familiar with some of the other popular indexes. Here are a list of a few:

S&P 500

Dow Jones Industrial Average

Nasdaq Composite

S&P International Preferred Stock Index

Russel 2000

U.S. Aggregate Bond Market

Global Aggregate Bond Market

The reason that you want to get familiar with some of these stock indexes, is because they all offer something different. To put it simply, each index, specializes in certain categories. For example, one stock index may have stock emphasis on tech companies, while others may have a stock emphasis on bonds, or agriculture. If you desire to purchase an index fund that mirrors a specific type of index, knowing the different indexes will help you narrow down the type of index fund you want.

Pros and Cons of Index Fund Investing

Investing in index funds is probably the simplest way to hit your financial goals, but it does take time to get there…UNLESS you have a lot of money for an initial deposit to begin. Since the average person does not have access to a ton of money, most of us (especially minorities) are looking at the minimal amount of entry to begin. I do believe that everyone should be involved in index fund investing, but I will be one of the first persons to tell you that it is NOT the ONLY vehicle to hit those goals. In order to see if index funds is for you or not, I will be going over a list of pros and cons so that you can see if this is a route for you to explore or not.

Pros of Index Fund Investing

Choosing index funds for your investing portfolio is an exciting moment. You’re making the decision to invest in your future and you’re almost guaranteed that you will reap the benefits of the stock market without the risk. But are they for you? Let’s find out. Here is the list of pros:

History of proven profitability in the market
Passively managed (you don’t have to pay someone to manage your account)
More likely to invest and not touch rather than trying to sell and “beat the market” and lost money
You can adjust the amount that you invest at anytime and the time period (weekly, monthly, annually)

Cons of Index fund Investing

Can be a higher cost of entry (VSTAX minimum entry is $3,500)
Can take up to 10+ years to really see benefit of investment portfolio
You can only buy/sell once a day unlike an ETF, where you can do it at anytime like a stock
Index funds are a long term approach with lower risks. May not be good if you’re not a patient investor

As you see, there a multiple reasons why one would choose to make this type of investment, or NOT make this type of investment. I can see it go either way. The real question is if you want to be in a sprint or a marathon. In the words of Nipsey Hussle – “Life is a marathon, not a sprint”.

You must figure out whether you are a person who can invest and let something grow by itself without much management, or if you are someone who loves to take big risks for bigger rewards. If you love to take risks so that you can gain that bigger regard, then this option may not be for you.

If you have a 401k or an Roth IRA, putting index funds in those vehicles of investments may be the better option because they are set for long term growth. But what do i know…I’m just an average joe trying to help you make an educated decision based upon my knowledge and mistakes 🙂

Conclusion

If you choose to go down this road, you cannot go wrong. There is a reason why Warren Buffet believes so vigorusly in index fund investing. In 2013, he placed a bet with a few hedge fund managers with the small little wager, to the tiny amount of…(drum roll please)…

$1,000,000!

This was a bet against the best who think that their expertise can outwit the stock market to produce higher profits against the steady and consistent index funds.

So who won the bet?

Mr. Buffet!

If that doesn’t’ speak volumes, then I don’t know what does. My father loves low risk and I’m beginning to understand why. If you’re going to put your hard-earned cash into something so that you can use it in the future, you want to secure it the best way possible. Trading stocks is great. Heck…you may even get lucky and get the right stock that doubls or triples the amount that you purcahsed it for, and you can sell it to make a huge profit!

But I’m not talking a one hit wonder here like Milli Vanilli. We’re talking about a self-growing container of money that you consistently deposit money in, and watch it grow over the next 20, 30, or even 40 years. If you choose to go this route, your future self will thank your present self.