| An index fund is a special type of fund that | | | | performance and suitability of the savings |
| invests money in financial vehicles that make up | | | | strategy about once a year. The only time you |
| an index. For example, a stock index fund that | | | | may want to consider setting up a "managed |
| wants to replicate the stock market may buy all | | | | account" is if you would like to get help with |
| 500 shares that make up a stock index like the | | | | managing your savings. In this case, an account |
| S&P 500 index. This "copycat" index fund will | | | | manager will help you allocate your savings, |
| change more or less in the same way as the | | | | monitor its performance with you, as well as |
| S&P 500 index. | | | | suggest and make any agreed-upon adjustments |
| A stock index fund will always move up and | | | | to the allocations. |
| down close to the same amount as the stock | | | | Whenever you choose an index fund, you don't |
| market. You will never be disappointed that your | | | | have to bother to choose a mix of individual |
| fund performed much worse than the stock | | | | stocks or mutual funds to perform for you. Using |
| market. Index funds work to ratchet up or down | | | | index funds will make investing in "the stock |
| in proportion to the market as a whole. When you | | | | market" fairly simple. In addition, index funds tend |
| read in the papers that the stock market went | | | | to do better on average than mutual funds; so it |
| up 15% in any given year, your index fund will | | | | makes your stock choice easier if you go with an |
| also be up about 15% if you had held that index | | | | index fund. |
| fund throughout the entire year. This does not | | | | When you invest in stocks, I would first invest |
| mean that an index fund will never go down in | | | | only in the US stock market and suggest only |
| value. It only means it will go down in value at | | | | buying shares in an S&P500 index fund. Once |
| about the same rate as the stock market should | | | | you accumulate some savings, you may want to |
| the stock market decline. The benefit of index | | | | sell some of your US stock holdings, say 10 - |
| funds is that they are expected to perform as | | | | 25% and put these proceeds into an international |
| well as the market as a whole. Since over the | | | | index fund. For a start, simplicity is a good recipe |
| long run the stock market is expected to go up, | | | | in this case. |
| index funds are largely considered a good bet for | | | | The S&P500 index is a broad index of US |
| investing. | | | | stocks that has a great track record in the long |
| Index funds have an additional benefit. As a rule, | | | | run delivering fairly steady returns to investors. |
| you pay a lot less in management fees for an | | | | On the other hand, international markets are |
| index fund than you pay for a so-called "actively | | | | riskier, which is why it is better for inexperienced |
| managed fund." Please click here to see how low | | | | investors to hold off investing in international |
| fees impact you in the long run. | | | | markets for a little while. However, mixing |
| Vanguard, the largest fund manager of index | | | | international index funds with an S&P500 |
| funds, also charges the lowest fees. Other | | | | index fund will likely make your returns steadier, |
| companies such as Schwab and T. Rowe Price | | | | since you will have your eggs in more than one |
| offer index funds, but they usually charge higher | | | | basket. When the US stock market or the |
| fees that simply diminish your annual return. | | | | S&P500 index does not perform well, it is |
| If you are interested in index funds, I suggest | | | | possible that international stocks perform better. |
| that you discuss index funds with an advisor at | | | | This could still give you a decent return on your |
| Vanguard or another company. Take care to only | | | | investment or cushion the decline in the US stock |
| discuss index funds and not "managed accounts". | | | | market a bit. |
| Fund management companies would like to get | | | | Index fund companies such as Vanguard also |
| you into "managed accounts", because they can | | | | offer bond index funds and money market index |
| charge you fees for "managing" your savings on | | | | funds. Investing in these other index funds allows |
| top of the management fees you pay for | | | | you to get exposure to three of the most |
| managing the fund itself. Once you have decided | | | | important ways to to save your money, and you |
| on a savings strategy, you do not really need | | | | can do it all with just one investment |
| your savings to be "managed". It is best to let | | | | management company. |
| such savings run on autopilot and to check on the | | | | |