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how to invest in index funds

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


- Warren Buffett

how to invest in index funds

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.

how to invest in index funds

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.

how to invest in index funds

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.

how to invest in index funds

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.

how to invest in index funds

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.

How to Invest in Index Funds

how to invest in index funds

How to Invest In Index Funds:

1. Open an investment account.

2. Research index funds.

3. Start investing.

4. Dollar-cost average contributions.

Let's dive into each of these steps below.

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

Index funds make up more than 60% of my net worth.  

I'm a huge fan of index funds.

If you're not confident in your ability to invest, the Follow Invest app is for you.

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