Plenty of people shy away from investing because of fear.
In fact, a survey from Ally Invest found that 65% of adults say they find investing in the stock market to be scary and/or intimidating. Whether it's the concern you'll make a bad investment and lose money or a lack of access to quality investing advice, at the end of the day that fear is holding you back from really growing your net worth.
The good news is there are many easy ways to invest; you don't have to worry about picking individual stocks, and hiring an expensive advisor isn't always necessary. One of the easiest ways to get started investing is through index funds.
How index funds work
Index funds are investment funds that follow a benchmark index, such as the S&P 500 or the Nasdaq 100.
When you put money in an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks.
Let's use the S&P 500 as an example. The S&P 500 is one of the major indexes that tracks the performance of the 500 largest companies in the U.S. Investing in an S&P 500 fund (one of the most popular) means your investments are tied to the performance of a wide range of companies.
Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus hold a lower risk than individual stock holdings. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, it has historically generated nearly a 10% average annual return over time for investors. (Just remember that future returns are not guaranteed.)
Index investing is a form of passive investing
Index investors don't need to actively manage the stocks and bonds investment as closely since the fund is just copying a particular index. This is why index funds are known as passive investing — and it's what sets them apart from mutual funds.
Mutual funds are actively managed by fund managers who choose your investments. The goal with mutual funds is to beat the market, while the goal with index funds is simply to match the market's performance. Since index funds don't require daily human management, they have lower management costs (called "expense ratios") than mutual funds. The money saved in fees by investing in an index fund over a mutual fund can save you lots of money in the long term and in turn help you make more money.
A common strategy for many investors who have a long investment timeline is to regularly invest money into an S&P 500 index fund (known as dollar-cost averaging) and watch their money grow over time.
Get started index investing with a brokerage account
Some of the top index funds are those that track the S&P 500 and have low costs. For example, Charles Schwab's S&P 500 Index Fund (SWPPX) is a straightforward option with no investment minimum. Its expense ratio is 0.02%, meaning every $10,000 invested costs $2 annually. Passive, or index funds, generally have a 0.2% expense ratio, so this is notably low.
For an option with no expense ratio, consider the Fidelity ZERO Large Cap Index (FNILX). Though the fund doesn't technically track the S&P 500, the Fidelity U.S. Large Cap Index tracks large capitalization stocks, which the website says, "are considered to be stocks of the largest 500 U.S. companies."
To invest in an index fund, you'll need to open a brokerage account, a traditional IRA or a Roth IRA (you can often choose to invest in index funds through your employer's 401(k) too). Once your account is open and funded, you can choose from a number of different index funds, like an S&P 500 fund, a fund that tracks government bonds or a fund that tracks international stocks.
Also, consider using a robo-advisor like Wealthfront and Betterment (which Select rated highly on our list of the best robo-advisors), which will invest in a handful of index funds and ETFs based on your risk tolerance and investment timeline. Robo-advisors will automatically rebalance your portfolio based on market conditions and have much lower fees than traditional financial advisors.
Read more
A robo-advisor can invest on your behalf — here’s how they work
Here’s how much money you should be investing in your 401(k)
Socially responsible investing can help you make a positive impact: Here’s what you need to know
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
Fortunately, it's easy to buy index funds. You can buy index funds through brokerages such as Charles Schwab, Fidelity or Vanguard. Financial advisors who hold client accounts at those companies or other brokerages can also buy index funds for you.
What are index funds and how do they work? ›
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index. Mutual funds and exchange-traded funds (ETFs) have many different varieties of low-cost index funds. They have lower expenses and fees than actively managed funds.
What are the pros and cons of index funds? ›
The benefits of index investing include low cost, requires little financial knowledge, convenience, and provides diversification. Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
Can index funds make you rich? ›
So, can index firms make you wealthy? Not by themselves. They are a great tool to increase your wealth over the long-term, but it depends on you. The more you can invest and the longer you can keep your money invested (and re-invested), the better off you will be.
How do you actually make money from index funds? ›
As with other mutual funds, when you buy shares in an index fund you're pooling your money with other investors. The pool of money is used to purchase a portfolio of assets that duplicates the performance of the target index. Dividends, interest and capital gains are paid out to investors regularly.
How do index funds pay out? ›
Dividend: These funds track companies that pay out higher dividends—portions of a company's earnings that some companies distribute out to current investors. The funds can pay out dividends too, based on the performance of the companies that the funds track.
Is it easy to take money out of an index fund? ›
There are hundreds of funds, tracking many sectors of the market and assets including bonds and commodities, in addition to stocks. Index funds have no contribution limits, withdrawal restrictions or requirements to withdraw funds.
Is it smart to put all your money in an index fund? ›
Lower risk: Because they're diversified, investing in an index fund is lower risk than owning a few individual stocks. That doesn't mean you can't lose money or that they're as safe as a CD, for example, but the index will usually fluctuate a lot less than an individual stock.
How long do you keep your money in an index fund? ›
Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
Do index funds ever fail? ›
Much of it, yes, but not entirely. In a broad-based sell-off of a market, the benchmark index will lose value accordingly. That means an index fund tied to the benchmark will also lose value.
Is now a good time to invest in index funds? Arguably, any time is a good time if you have an investment horizon of a decade or more. Viewed long-term, major equity indexes have robust track records. For example, the S&P 500's average return is 10.67% annualized since the inception of its modern structure in 1957.
What is the main advantage of index funds? ›
Advantages of Index Funds
The main advantage is, since they merely track stock indexes, they are passively managed. The fees on these index funds are low because there is no active management. Exchange traded funds (ETFs) are often index funds, and they generally offer the lowest fees of all.
What if I invested $1,000 in the S&P 500 10 years ago? ›
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
How to double 10K quickly? ›
How To Double 10K Quickly
- Flip Stuff For Money. One of the more entreprenurial ways to flip 10k into 20k is to buy and resell stuff for profit. ...
- Invest In Real Estate. ...
- Start An Online Business. ...
- Start A Side Hustle. ...
- Invest In Stocks & ETFs. ...
- Fixed-Income Investing. ...
- Alternative Assets. ...
- Invest In Debt.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Which index fund is best for beginners? ›
Best Index Funds to Invest
- UTI Nifty Index Fund: ...
- ICICI Prudential Nifty Next 50 Index Fund: ...
- Mirae Asset Nifty 50 ETF: ...
- HDFC market Fund - Sensex Plan: ...
- Nippon India Index Fund - Sensex Plan: ...
- SBI Nifty Index Fund: ...
- Motilal Oswal Nasdaq 100 ETF: ...
- Kotak Nifty ETF:
How much is needed to invest in an index fund? The minimum needed depends on the fund and your broker's policies. If your broker allows you to buy fractional shares of stock, you may be able to invest in index fund ETFs with as little as $1. If not, your minimum investment will be the cost of one share of the ETF.
