As an extension on my post about mutual funds, I think it is important to talk about a specific type of mutual fund that I do the majority of my investing in: Index Funds.
As mentioned, John Bogle created the first low cost index funds and it wasn’t until late with Fidelity has anyone ever competed with Vanguards investor friendly fees.
So what are low cost-index funds?
So let’s break it down, an index fund is portfolio made to track a specific market index. The most common market indexes being the S&P 500, Dow Jones, and the NASDAQ. All of which we have seen at one time or another in the paper, on a website, or scrolling across the TV.
These specific indices track America’s 500 largest stocks, the 30 largest companies in each individual industry/sector, and the over 3000 stocks openly traded on the Nasdaq exchange, respectively. (The Nasdaq can basically be viewed as the electronic version of the New York Stock Exchange)
What an index fund is then, is a portfolio of stocks put together to track these different indices like the 3 listed above.
Did I lose anyone yet??
Basically, If you bought a share of the S&P 500 index fund, you would be buying a small piece of a portfolio that tracks the S&P 500 or in other words you would own a small piece of each of the 500 largest stocks in the United States.
These can be viewed as Low Cost index funds because these portfolio’s don’t need to be actively managed by a fund manager because they do not require any research, analysis, or planning. Hence the generally small expense ratios and my love for them.
Different Index Funds
I listed the most popular/common United States indices but index funds can be created to represent different sectors, different market sizes (I.e. mid cap, small cap, etc), locations in the world, or the whole world itself.
For example, my favorite index fund (along with many other FI’ers) is Vanguards VTSAX which represents nearly 100% of the United States investable market. So owning that index fund buys you a small piece of every US stock that you could purchase.
What’s the benefit of Index Fund Investing
I plan to break down this long list of benefits in the future but in an effort to keep this post manageable and digestible, I will do so in a series of future posts. As I’m sure you have gathered, the main benefit of low cost index fund investing is cost, safety, return, and simplicity.
For those still interested in learning in more detail, I advise you to visit Jim Collins stock series where he explains these concepts with much more elegance and grace than I possibly could.
I still plan to explain it in my own words, as I feel this is beneficial for my own personal growth and in providing the information from another voice or point of of view.
What do you invest in??
Feel free to comment below with any questions or if you have specific or personal questions feel free to contact me here!
