how to invest in index funds

"By periodically investing in an index fund, the investor can actually out-perform most investment professionals."

- Warren Buffett

What's an Index Fund?

An index fund is a fund which mimics an index.

The S&P 500, the Dow Jones, the NASDAQ, and the Russell 2000 are all examples of US indexes.

Indexes represent a certain segment of the stock market.

S&P 500 Index

The S&P 500 is made up of the 500 largest companies in the US from a market capitalization point of view.

Market capitalization = share price * # of shares outstanding

Apple, Microsoft, Amazon, Tesla, Google, and Meta are among the top holdings in the S&P 500 Index.

Dow Jones Industrial Average Index

The Dow Jones is made up of only 30 stocks which represent the 30 large, well-respected companies in the US.

Microsoft, Boeing, Salesforce, Intel, Nike, JP Morgan Chase, Apple, McDonald's, Procter & Gamble, and Coca-Cola are holdings within the Dow Jones Industrial Average.

NASDAQ Composite Index

The NASDAQ Composite Index is made up of over 3500 different stocks.

To be included in the NASDAQ, a company must have earnings of at least $11 million in the previous 3 years and cash flow of at least $27.5 million in the previous 3 years.

Benefits of Index Funds

Index funds provide built-in diversification.

Your eggs aren't all in one basket.

Index funds are the vehicle in which you can purchase a fund which mimics an index.

STEP BY STEP: HOW TO INVEST IN INDEX FUNDS

Start Investing Today

1. Open an Investment Account

Research the websites of the large discount brokerages.

Some examples are:

Fidelity
Charles Schwab
Vanguard
E-Trade
TD Ameritrade

2. Research Index Funds

Look at your discount brokerage website to confirm these three characteristics of the funds:

A. Historical returns

This is the most important statistic.

Find a fund that has performed well over its lifetime and over the last 10 years.

B. Expense ratio

The expense ratio represents the amount of management costs associated with that fund.

Find funds with expense ratios less than 0.25%.

C. Turnover ratio

Turnover represents how many stocks are turned over each year (sold & bought).

The higher this percentage, the more likely you are to owe tax at the end of the year.

Find funds lower than 2.00%.

3. Start Investing

Don't fall into the trap of analysis paralysis when you first start investing.

The beauty of index funds is you only need to choose which index you prefer and then choose one of the funds which mimic your chosen index.

To simplify your life and reduce the friction of investing, link your checking account to your investment account.

Choose an amount you will invest every paycheck and transfer the funds every paycheck.

4. Dollar Cost Average (DCA) Your Contributions

Dollar cost averaging is the act of consistently investing, whether that is every two weeks, once a month, or quarterly.

DCA works because the market is volatile.

You may buy 10 shares one week, but are able to buy 12 shares the following month due to the prices decreasing.

Setting up a consistent amount to invest and investing in index funds gives you the freedom to not look at your account balance everyday.

You can invest with confidence, knowing your investments will pay off significantly in the long run.

Popular Index Funds

Vanguard 500 Index Fund ETF

Ticker: VOO

0.03% expense ratio

SPDR S&P 500 ETF Trust

Ticker: SPY

0.09% expense ratio

iShares Core S&P 500 ETF

Ticker: IVV

0.03% expense ratio

Invesco QQQ Trust Series 1

Ticker: QQQ

0.20% expense ratio

Fidelity® NASDAQ Composite Index® Fund

Ticker: FNCMX

0.30% expense ratio

Fidelity® 500 Index Fund

Ticker: FXAIX

0.015% expense ratio

Schwab Total Stock Market Index Fund®

Ticker: SWTSX

0.03% expense ratio

Get the latest market news and tons of index fund research at Seeking Alpha.

Learn more here

how to invest in index funds

What's an Index Fund?

S&P 500 Index

Dow Jones Industrial Average Index

NASDAQ Composite Index

Benefits of Index Funds