Online Investing Hacks

Index Funds, Anyone?

So you want instant diversification, basic asset allocation, low costs, less chance of management shenanigans, and you’re content to achieve the long-term average returns in the stock market? You can have all this by purchasing shares in index mutual funds. These funds don’t try to beat the market—they try to match it or at least a part of it by buying all the companies represented in an index. For example, if you want to split your money 50/50 between large and small companies, you can put half your cash in an S&P 500 Composite Stock Price Index Fund for the large-cap stocks and the other half in a fund that follows the Russell 2000 index for small-cap stocks.

Index funds typically charge very low expenses, because the funds don’t have to research or trade very much. The fund manager follows only the securities (stocks or bonds) that comprise the index and trades only when the composition of the index changes, or to fulfill purchases or sales of fund shares.

Index funds are as close to what you see is what you get as you can reach in the financial world. Index funds are easier to research, but they still aren’t automatic investments. Because index funds must primarily purchase the securities in an index, you can identify an index fund’s objectives and strategies by the index it follows. The fund risks are the same ones you encounter investing directly in the securities in the index. However, some index funds take extra steps to keep their returns above the index, ...