Index funds are one of the easiest ways to invest. That's how they work (2024)

Many people hesitate to invest because of fear.

Actually oneinspectionvanAlly Investfound that 65% of adults say they find investing in the stock market scary and/or intimidating. Whether it's the worry that you'll make a bad investment and lose money or a lack of access to quality investment advice, fear ultimately stops you from truly growing.net value.

The good news is that there are many simple ways to invest; you don't have to worry about choosing individual stocks, and it's not always necessary to hire an expensive advisor. One of the easiest ways to start investing is through index funds.

Index funds are investment funds that track a benchmark index, such as the S&P 500 or Nasdaq 100.

When you put money into an index fund, that money is used to invest in all the companies that make up that index, giving you a more diverse portfolio than if you bought individual stocks.

Let's take the S&P 500 as an example. The S&P 500 is one of the leading indexes that tracks the performance of the 500 largest companies in the United States. Investing in an S&P 500 fund (one of the most popular) means that your investments depend on the performance of a wide range of companies.

Because the goal of index funds is to mirror the same positions in the index they track, they are inherently diversified and thus have lower risk than individual stock positions. Market indices also generally have a good track record. While the S&P 500 certainly fluctuates, historically it has generated almost one index10% average annual returnover time for investors. (Please note that future returns are not guaranteed.)

Index investing is a form of passive investing

Index investors don't have to manage stock and bond investments as closely if the fund simply copies a particular index. This is why index funds are known as passive investing – and this is what sets them apart from mutual funds.

Investment funds are actively managed by fund managers who choose your investments. The goal of mutual funds is to beat the market, while the goal of index funds is simply to match the performance of the market. Because index funds do not require day-to-day human management, they have lower management fees (called "expense ratios") than mutual funds. The money you save in fees by investing in an index fund instead of a mutual fund can save you a lot of money in the long run and in turn help you make more money.

A common strategy for many long-term investors is to regularly invest money in an S&P 500 index fund (also called dollar-cost averaging) and watch their money grow over time.

Some of the best index funds are those that track the S&P 500 and have low fees. For example,Charles Schwabs S&P 500 index funds(SWPPX) is a simple option with no minimum investment. The expense ratio is 0.02%, which means that every €10,000 invested costs €2 per year. Passive or index funds generally have an expense ratio of 0.2%, which is remarkably low.

Consider a no-fee optionFidelity NUL Large Cap-index(FNILX). Although the fund does not technically track the S&P 500, the Fidelity U.S. The Large Cap index large stocks, whichthe websitesays: "considered stocks of the 500 largest U.S. companies."

To invest in an index fund, you need to open onebrokerage account, Atraditional IRAshe hasRoth IRA(you can often choose to invest in index funds via uw.nl).employer 401(k)Also). Once your account is opened and funded, you can choose from several index funds, such as an S&P 500 fund, a fund that tracks government bonds, or a fund that tracks international stocks.

Also consider using onerobo-advisorlike itThe prosperity frontInImprovement(Whichto electhighly rated on our list ofbest robo-advisors), which will invest in a handful of index funds and ETFs based on your risk tolerance and investment timeline. Robo-advisors automatically rebalance your portfolio based on market conditions and charge much lower fees than traditional financial advisors.

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